A sustainable housing recovery is under way nationwide and in Arizona.
While there has been great strength in the construction of apartments and town houses, there is now an upturn in single-family homebuilding.
Nationally, new housing starts are up 22 percent over last year. In Arizona, permits for new-home construction are 80 percent above last year. In Pima County, the 12-month increase is 29 percent.
Real investment in housing nationally has increased for five straight quarters. Existing-home sales are around 5 percent higher than a year ago, and the amount of inventory for sale is close to the six-month sales figure that is considered normal.
Home prices are also beginning to rise. Repeat-home-sales numbers from the Federal Housing Finance Agency show around a 3 percent increase in home prices in Arizona. This is the first annual gain since early 2007.
Phoenix saw approximately the same quarterly percentage gain. While prices slumped by about 2.5 percent in Tucson, the rate of decrease here has been slowing.
The improving housing market is the natural result of several years of very low home-building. Between new household formations, conversions to other uses as well as scrappage, the U.S. needs around 1.2 million new homes per year.
Housing starts peaked at 1.8 million units in 2005 and were far above net household formations for years.
Thus, the enormous overstock of houses in 2006. The marketplace solved this problem brutally with housing construction then falling to around 400,000 homes annually. It is easy math to see that if you need 1.2 million new homes a year and are building 0.4 million you will reduce the amount of unneeded houses.
Related to this is the impact of excess homes on the ownership-vs.-rent decision.
For the last 50-plus years, home-price-to-rent ratios nationwide have averaged around 15, so that a $150,000 home could be rented for $10,000 per year.
At the peak of the housing bubble this ratio was around 21, or 40 percent above its long-run average.
Homes were extremely expensive then relative to renting.
But now the situation has reversed itself. The combination of a large drop in home prices along with rising rents has dramatically lowered their ratio to around 13, which is 10 percent to 15 percent below its long-run average.
Owning is a better value.
Another way to view this is to estimate the rate of return on owning a house.
Economists do this by looking at the rent you save when you become a homeowner plus home-price appreciation, less costs of owning a home, such as property taxes, insurance, maintenance and mortgage costs.
This "profit" is then divided by the down payment to give a percent rate of return. At an average price-to-rent ratio of 15, this produces a real (after-inflation) return of around 6 percent.
At the peak of the housing bubble the return was negative. If we look ahead, given the current low price-to-rent ratios, the real rate of return on homes is in excess of 10 percent.
The fact that homes are an outstanding value now is contributing to a sustainable recovery in the housing market.
Michael Bond, Ph.D., is a senior lecturer in the Eller College of Management department of finance at the University of Arizona. Email him at mtbond@email.arizona.edu
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