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March 26, 2014

New Freddie Mac Index Measures the Stability of Nation’s Housing Markets

Frank E. Nothaft
Frank E. Nothaft, VP Chief Economist

It has been more than seven years since the beginning of the deepest housing recession since the Great Depression. As housing activity fell, nervous speculation took off in the media and industry about when (if ever) housing would get back to normal. Given the pickup in sales, new construction, and home values over the past couple of years, it’s fair to ask if we’re there yet: is the U.S. housing market back to a normal range of activity with a good balance between demand and supply forces?

Clearly, housing is stronger today than at any point since the Great Recession began. Compared to the recession’s June 2009 trough, total home sales are up 13 percent, housing starts are up 55 percent, serious delinquencies are down 32 percent, and the unemployment rate has come down from 9.5 percent to 6.7 percent, though at a stubbornly slow pace. But has the market recovered, is it still recovering, or (as some claim) is it overheating into a new bubble?

To find out, we reviewed the various definitions of a "normal" housing market. We rejected definitions pegging normal to the peak of the last market as too vague, since peaks are inherently unstable, and unhelpful from a responsible business perspective. Instead we used current and historic data to define a "normal" market as one where there is a stable range of housing activity.

We then used this "stable" definition of normal housing market activity for each of the nation's 50 states, the District of Columbia, and 50 largest metro markets to create a new monthly Freddie Mac Multi-Indicator Market IndexSM (MiMiSM). MiMi monitors, measures, and graphically shows where each of these housing markets are today in relation to their stable ranges and recent past.

MiMi relies on data from Freddie Mac's daily business with lenders from across the country plus current local market data from other sources. Specifically, MiMi determines where each market is relative to its own long-term stable range by looking at home purchase applications, payment-to-income ratios (changes in household home purchasing power based on house prices, mortgage rates, and household income), proportion of on-time mortgage payments in each market, and the local employment picture. We benchmarked each of these components to their last stable period prior to the 2005-2006 "bubble" to determine whether they are "In Range" of their long-term norm. The four indicators are averaged to create a composite MiMi value for each market covered.

MiMi also shows how each market is trending, i.e., whether it is moving closer to or further away from its stable range. Markets can fall outside their stable range by either being too weak to generate enough demand to sustain a stable market or by overheating to an unsustainable level of activity.

So back to the question: is housing normal again? The answer is, “That depends on where you live.” According to the March release of MiMi, which shows data for January, there are only 11 states and 4 metro markets that are "In Range" of their long-term benchmark periods. Housing in the rest of the country continues to fall short of its long-term stable range. But the upside is that 35 of the 50 top metros and 24 of the 50 states are trending in the right direction.

* Frank Nothaft left his position with Freddie Mac in January 2015.

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