Nation Inches Closer to a Recovery But Underlying Variation Persists

For the country as a whole, the NAHB/First American Leading Markets Index (LMI), released today, rose to .98 in the third quarter of 2016, .01 point higher than its level in the second quarter of 2016, .97, and .05 point higher than its level from one year ago, .93. The LMI is now .20 point above its low of .78 reached in March 2012. The index uses single-family housing permits, employment, and home prices to measure proximity to a normal economic and housing market. The index is calculated for both the entire country and for 337 local markets, metropolitan statistical areas (MSAs). A value of 1.0 means the market (or country) is back to the last level of normality.

The nation is improving as the recovery spreads across local markets. Over the quarter, 77% of metro areas saw an increase in their LMI score while 9 out of 10, 91%, recorded an annual increase. Currently, four out 5 metro areas have an LMI Score at or above .87 and 3 out of 5 areas equal or exceed .95. The number of areas considered normal now totals 162, 48% of the 337 markets tracked. Historically, about half of metro areas are considered normal when the US LMI Score reaches 1.0.

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However, the three underlying components of the LMI are at widely different stages of recovery. Nationwide, house prices have surpassed normal levels, employment is near normal, but permits are the laggard. Over the quarter, the increase in the US Score reflected a .02 increase in the house prices sub-score, 1.43 to 1.45, a .01 increase in the permits sub-score, .50 to .51, and a .01 increase in employment, .97 to .98. Over the past year, the .05 point increase in the LMI reflected a .08 jump in the house price component, a .04 point climb in the permits category, and a .02 rise in the employment portion.

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The figure above presents a different way to illustrate how the underlying components are at widely different stages of recovery. The chart plots the distribution of scores across all 337 local markets, both the overall score for each metro area and the scores of the subcomponents. As shown in the graph, the distribution of the overall LMI Scores across metro areas is centered at 1.0. House prices in the majority of metro areas are considered recovered while permits in most markets are lagging. Additionally, although the range of scores in the permits and house prices subcomponent are more dispersed, the range in the employment category is more concentrated around 1.0.



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