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Here's Why Housing Markets With Booming Prices Haven't Fully Recovered: Construction

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The Trulia Price Monitor and the Trulia Rent Monitor are the earliest leading indicators of how asking prices and rents are trending nationally and locally. They adjust for the changing mix of listed homes and therefore show what's really happening to asking prices and rents. Because asking prices lead sales prices by approximately two or more months, the Monitors reveal trends before other price indexes do. With that, here's the scoop on where prices and rents are headed.

Asking Prices Rise in August, but Price Slowdown Continues
Asking home prices increased 1.2 percent month-over-month in August after being essentially flat in July (this month, July's figure was revised upward from an originally-reported decline of 0.3 percent). However, monthly changes are volatile. This is why we also look at quarter-over-quarter changes -- which are less jumpy -- to see the trend in asking-home prices. Quarter-over-quarter, prices rose by 3.1 percent in August, down from 3.2 percent in July and a peak of 4.0 percent in April.

That said, a 3.1 percent quarterly increase is still sizeable: if that rate continued for a full year, it would mean a 13 percent jump in prices. But we expect prices to slow further, for three reasons: rising mortgage rates (rates have risen more than a full point since early May), expanding inventory (as reported by NAR, inventory has increased for six months straight on a seasonally adjusted basis) and declining investor demand.

August 2013 Trulia Price Monitor Summary

percent change in asking prices

# of 100 largest metros with asking-price increases

percent change in asking prices, excluding foreclosures

Month-over-month, seasonally adjusted

1.2 percent

Not reported

0.8 percent

Quarter-over-quarter, seasonally adjusted

3.1 percent

96

3.6 percent

Year-over-year

11.0 percent

98

11.3 percent

* Month-over-month change is August versus July. Quarter-over-quarter and year-over-year changes are three-month averages. Data from previous months are revised each month, so data being reported now for previous months might differ from previously reported data.

Trulia Price Monitor_Line Chart_Aug2013

Buyers and Builders Bet on Different Local Markets
Four metros have seen asking prices jump more than 25 percent year-over-year: Las Vegas, Sacramento, Oakland and Riverside-San Bernardino. Nine more -- including five more in California -- have had price gains of 20 percent or more. Price rebounds are helping normalize the housing market: rising prices lift borrowers back above water, and price appreciation will encourage more homeowners to sell -- which has already started to bring more inventory onto the market.

Do these huge price rebounds mean these markets are back to "normal?" Hardly. Many of these rebounding markets are still hung over from the excesses of the bubble, with lots of vacant homes thanks to overbuilding during the bubble and slow household formation since the bubble burst. A key indicator of local recovery -- beyond a price rebound -- will be the return of construction to normal levels. That's because builders won't build in markets that still have a lot of housing supply relative to demand. Nationally, the housing recovery hasn't reached the phase when construction returns to normal levels: construction permits in 2013 are around just 60-70 percent of the average levels seen between 1990 and 2012.

At the local level, in most of the markets with the biggest year-over-year price rebounds, construction in 2013 is running far below normal. In Las Vegas, Sacramento, Riverside-San Bernardino, Warren-Troy-Farmington Hills and Detroit, price gains were more than 20 percent year-over-year, but construction was less than half the normal level. Among markets with 20 percent price gains, only Orange County and San Jose were at or above normal construction levels.

Where Asking Home Prices Rose Most
# U.S. Metro Y-o-Y percent change, Asking Prices August 2013 Construction permits, 2013 year-to-date, relative to local long-term normal
1 Las Vegas, NV 33.6 percent 39 percent
2 Sacramento, CA 31.9 percent 38 percent
3 Oakland, CA 29.3 percent 60 percent
4 Riverside-San Bernardino, CA 25.4 percent 46 percent
5 Orange County, CA 23.8 percent 125 percent
6 Bakersfield, CA 23.1 percent *
7 Phoenix, AZ 22.7 percent 53 percent
8 Warren-Troy-Farmington Hills, MI 22.5 percent 46 percent
9 Los Angeles, CA 22.3 percent 93 percent
10 Detroit, MI 22.2 percent 33 percent
11 San Jose, CA 20.3 percent 135 percent
12 Atlanta, GA 20.1 percent 56 percent
13 San Diego, CA 20.1 percent 82 percent
14 Fresno, CA 19.4 percent *
15 Portland, OR-WA 19.1 percent 92 percent
16 Ventura County, CA 18.9 percent *
17 Grand Rapids, MI 18.3 percent 42 percent
18 Orlando, FL 17.5percent 88 percent
19 San Francisco, CA 17.0 percent 137 percent
20 Fort Lauderdale, FL 16.8 percent 59 percent
Note: Construction permits based on Census data. Not all local areas report monthly permit data to the Census.

In fact, in markets where construction has fully recovered, there have been more modest price gains year-over-year. Construction is above normal levels in Boston and neighboring Middlesex County, Houston and Austin, TX, Oklahoma City and Tulsa, OK and several other metros -- most of which have had price gains of less than 10 percent year-over-year -- putting their price rebound below the national average.

 
Trulia Price Monitor_Scatterplot_Aug2013

Why are builders building less in markets where investors and other buyers are pushing up prices most? The key driver of this past year's price rebound was the earlier price crash: markets with the biggest price drops during the bust tend to have the sharpest price gains today, in part because they've attracted investors and others looking to buy at low prices. Builders, however, don't want to build where there are already bargain homes for sale. They're betting instead on markets that had milder housing busts, less overbuilding during the boom and, therefore, lower vacancy rates today. In short: investors have their eye on Las Vegas and Atlanta, but builders prefer Houston and Boston. Only when construction starts to approach normal levels will housing markets in price boomtowns like Sacramento and Phoenix feel like they're back on steady ground.

Rents Up 3.5 Percent, Rising Faster on Apartments Than on Single-Family Homes
Rents rose 3.5 percent year-over-year nationally: up 3.9 percent on apartment units but only 1.6 percent on single-family homes. Locally, rents are rising fastest in Seattle, Portland and Miami, but declining slightly in Philadelphia, Washington and Sacramento. Looking at single-family homes only, rents are down year-over-year in six of the 25 largest rental markets, including investor favorites like Las Vegas, Phoenix and Atlanta.

Rent Changes in 25 Largest Rental Markets
# U.S. Metro Y-o-Y percent change, all units Y-o-Y percent change, apartments only Y-o-Y percent change, single-family homes only
1 Seattle, WA 9.8 percent 10.5 percent 2.0 percent
2 Portland, OR-WA 8.2 percent 9.1 percent 5.2 percent
3 Miami, FL 7.0 percent 7.7 percent 4.0 percent
4 Houston, TX 6.7 percent 6.6 percent 7.4 percent
5 San Francisco, CA 6.5 percent 7.2 percent 1.8 percent
6 Denver, CO 6.1 percent 6.6 percent 3.0 percent
7 San Diego, CA 4.8 percent 5.0 percent 4.3 percent
8 Dallas, TX 4.7 percent 5.4 percent 2.2 percent
9 Riverside-San Bernardino, CA 4.6 percent 5.5 percent 3.1 percent
10 Oakland, CA 4.5 percent 5.9 percent -1.8 percent
11 Baltimore, MD 4.2 percent 4.4 percent 4.8 percent
12 Orange County, CA 4.1 percent 4.8 percent -0.7 percent
13 Los Angeles, CA 4.0 percent 4.0 percent 4.2 percent
14 Tampa-St. Petersburg, FL 3.7 percent 3.8 percent 2.2 percent
15 New York, NY-NJ 3.7 percent 3.7 percent 3.6 percent
16 Boston, MA 3.4 percent 3.4 percent 3.5 percent
17 Phoenix, AZ 3.3 percent 5.3 percent -1.3 percent
18 Chicago, IL 2.6 percent 2.8 percent 1.5 percent
19 St. Louis, MO-IL 1.8 percent 2.2 percent 0.2 percent
20 Atlanta, GA 1.7 percent 2.2 percent -0.3 percent
21 Minneapolis-St. Paul, MN-WI 1.6 percent 1.8 percent 2.2 percent
22 Las Vegas, NV 1.5 percent 2.7 percent -0.6 percent
23 Philadelphia, PA -0.7 percent -0.8 percent 0.8 percent
24 Washington, DC-VA-MD-WV -0.8 percent -0.8 -4.7 percent
25 Sacramento, CA -1.1 percent -1.9 percent 1.0 percent
Among 25 largest rental markets.  

The next Trulia Price Monitor and Trulia Rent Monitor will be released on Thursday, October 3, at 10 AM ET

How did we put this report together? To recap the methodology, the Trulia Price Monitor and the Trulia Rent Monitor track asking home prices and rents on a monthly basis, adjusting for the changing composition of listed homes, including foreclosures provided by RealtyTrac. The Trulia Price Monitor also accounts for the regular seasonal fluctuations in asking prices in order to reveal the underlying trend in prices. The Monitors can detect price movements at least three months before the major sales-price indexes do. Historical data are sometimes revised each month, and historical data in the current release are the best comparison with current data. Our FAQs provide all the technical details.