Nationwide Recovery Continues

For the country as a whole, the NAHB/First American Leading Markets Index (LMI), released today, rose .01 point over the quarter to 1.0. Over the past year, the LMI grew by .05 point. 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 three components have individually, whether for the country as a whole or an individual metro area, achieved a level of recovery that combined averages 1.0.

The current LMI Score combined with the upward trajectory of the Index was last observed in 2003, a period considered normal. Over the housing boom years of 2004-2007, the LMI rose, peaking at 1.22 in 2006. The ensuing decline in the Index reflected the distress observed in the housing market and in the economy more generally. After falling to a low 0.78 in 2012, the LMI has been steadily climbing, in line with the overall economic recovery.

The overall LMI Score averages scores of its 3 categories mentioned above. Although each of these components declined over the last recession, the extent of the decrease varied across each class. The employment component, measured relative to its 2007 level, fell 9 percent to 0.91 while the house prices component, measured relative to the average levels between 2000 and 2003, fell 25 percent to 1.12. Meanwhile, single-family permits decreased 75 percent to 0.31.

Although each LMI component has begun to show signs of recovering, each are at vastly different points of recovering. Relative to 2003, a period when the Score of each of the LMI’s subcomponents reached 1.0, house prices are currently at 1.50, their peak level in 2007, while employment is currently at 0.98, .02 point below its peak level of 1.0. At 0.53 single-family permits are furthest away from normality.

An alternative, but more speculative, interpretation of the trends in the components of the overall LMI is that the permits trend indicates that too few homes are in the pipeline to be built, contributing to the low housing inventory, while the prospects for housing demand, as suggested by the employment component, is closer to normalizing. Economic theory posits that, all else equal, in the presence of low housing inventory, healthy housing demand will be reflected in higher house prices.

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