This article first appeared in the St. Louis Beacon: The good news is starting to percolate up from a still recovering economy. The Conference Board recently released its May Consumer Confidence Survey and our subjective appraisal of current economic conditions has improved over April, a trend over the past few months. This tentatively rosy outlook is matched by the Thomson Reuters/University of Michigan consumer sentiment index, which also is on the rise.
Where is this confident sentiment emanating from? Two important reasons come from improvements in the labor and housing markets.
Payrolls are increasing across states. New data from the Labor Department indicate that a majority of states are seeing payrolls increasing and unemployment rates dropping. The report noted that Texas recorded the largest gain with 33,100 new jobs. Behind Texas in jobs created were New York, Florida and California, an important fact since these four states accounted for about one-third of U.S. output before the onset of the Great Recession.
The Labor Department also reported that 274 out of the 372 metropolitan areas in the country registered year-over-year increases in nonfarm payrolls since April 2012. While one may quibble whether those statistics accurately gauge labor market activity, job creation is more widespread than in the past. This should not be lightly discounted.
The housing market also is improving on several fronts. One is the reduced number of foreclosures. Data from CoreLogic, which tracks the housing market, showed that the number of foreclosed homes in April was comparable to March. At 52,000, the level is noticeably lower than last April when 62,000 homes were foreclosed. While the current number remains more than double the average number of foreclosures before the housing crisis, the decline in foreclosures is a positive signal.
Fewer foreclosures mean that fewer fire-sale homes are hitting the market and keeping home prices low. Since early 2009, the government has used several programs to increase the transition of homes that were in financial distress: short sales, reductions in principal balances and various programs of debt relief for strapped homeowners appear to be working. The question is whether such programs will mask the true price for housing as the economy moves forward and such programs are phased out.
Home prices are rising in most markets. The most recent S&P/Case Shiller home price index is significantly higher than last year’s level. Warning: Percentage changes can be misleading since a small increase from a low level is magnified. Even so, home prices continue to improve, which buoys consumer sentiment. And that, policymakers hope, translates into increased spending.
What is the benchmark to which we should compare our home’s price? That is, should we use pre-recession house prices as the proper reference point or some other value? Where we might expect home prices to be if the bubble had not occurred?
To provide some perspective, I calculated the average annual percentage increase in housing prices between 1990 and 2000 using the Case Shiller 10-city index (it begins in 1987 while the preferable 20-city index begins in 2000). This decade was characterized by economic growth, but not a housing bubble. I then used this value to project forward the 2000 level of the Case Shiller index to 2012, the most recent complete year of data.
Based on this calculation, my answer to the question is “What would house prices be today if there had not been a bubble?” is just about where they now are. The Case Shiller 10-city index was 153.83 for 2012 and my back-of-the-envelope prediction is 156.70.
The implication is that housing prices on average are not likely (nor should they) increase at the rate we became accustomed to in the last decade. It will, therefore, take more time for some homeowners to claw their way back to financial health. Still, with the majority of homeowners not underwater, the increase in home values is another positive sign that the economy is getting back on its feet.
R.W. Hafer is a distinguished research professor of economics and finance at Southern Illinois University Edwardsville and a research scholar with the Show-Me Institute, St. Louis.