According to the NAHB/First American Leading Markets Index (LMI), 84 percent, 282 metropolitan statistical areas, recorded growth in their LMI Score over the third quarter of 2017. 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 337 local markets, metropolitan statistical areas (MSAs), as well as the entire country. A value of 1.0 means the three components have achieved a level of recovery that combined averages 1.0.
Of the 337 metro areas tracked by the LMI, 197 of them have an LMI Score that exceeds 1.0. In addition, 4 out of 5 metro areas have a LMI Score that exceeds .90. The number of metro areas where overall market activity has normalized was six more than the number in the second quarter of 2017, 191. Compared to a year ago, the number is up by 40 metro areas.
House prices continue to be a key driver of the LMI results. Of the 337 markets tracked by the LMI, house prices in 332 areas have normalized or are above 1.0. Meanwhile, in 118 markets employment conditions have normalized, while in 70 markets, single-family permits have normalized.
Over the quarter, employment saw the largest number of metro areas normalizing, an increase of 11 from 107 metro areas in the second quarter of 2017 to 118 in the third quarter of 2017. The permits category recorded the second largest numerical increase in the number of metro areas normalizing over the quarter, climbing by four to 70. The number of areas where house prices normalized climbed by one to 332. However, house prices have normalized across 98.5 percent of the metro areas. Over the past year, the expansion in the labor market recovery across the localities also led the other two categories, as an additional 47 metro areas normalized during this time period. The number of metro areas where house prices normalized increased by 5. However, despite the increase over the quarter, the number of areas where permits normalized was flat for the year.
The LMI Score for the country as a whole reached 1.03. However, at 1.55, only the house price component is above 1.0. Meanwhile, the employment component sits at 0.99 and single-family permits are currently at 0.56. One interpretation of these metrics is that the slower recovery in housing supply coupled with strong demand is contributing to house price appreciation. At the same time, analysis of individual markets reveals that in areas where the overall economic fundamentals are strongest, permits have normalized, but in areas where the overall recovery is not as strong, the recovery of single-family permits represents a key challenge.