Housing Barometer Indicates Market is Moving Closer to ‘Back to Normal’ Levels

While housing recovery has generally been uneven for the last few years, the housing market experienced substantial growth in the fourth quarter of 2014 for all five indicators of Trulia's Q4 2014 Housing Barometer, which was released on Thursday.

Three of the five indicators – existing home sales, excluding distressed sales; home price level; and delinquency plus foreclosure rate – are all more than three-quarters of the way "back to normal" as of the end of 2014, according to the barometer.

Three of the five indicators experienced double-digit percentage increases from a year ago; the only indicators that did not, existing home sales, excluding distressed sales and new construction starts, increased by 9 percent and 7 percent, respectively.

Trulia has been using this barometer to track how quickly the housing market is returning to "normal" since February 2012, with 0 percent indicating a particular area of housing's "Worst During Recession" while 100 percent represents "Normal."

Existing home sales, excluding distressed sales, tracked by the National Association of Realtors (NAR), were deemed 82 percent back to normal by Trulia's barometer in Q4, a slight increase from 80 percent the previous quarter and a jump of 9 percent from Q4 2013. While foreclosure sales and short sales were down and non-distressed sales were up by 8 percent in November, existing home sales still outpaced new home sales by 11 to 1 – nearly double the long-term normal ratio of 6 to 1, according to Trulia.

Home price level, tracked quarterly by Trulia's Bubble Watch (the other four indicators are all tracked monthly), rose up to 82 percent in Q4 after posting levels of 73 percent in Q3 and 66 percent in Q4 2013. Houses were just 2.4 percent undervalued nationwide in Q4 2014, compared to 13.5 percent at the worst of the housing bust. According to Trulia, houses are undervalued by 10 percent or less in 70 of the largest 100 metro areas, the highest number since the recovery began.

The delinquency plus foreclosure rate, tracked by Black Knight Financial Services, increased from 59 percent in Q4 2013 up to 76 percent in Q4 2014. This can be attributed to the declining number of underwater borrowers, according to Trulia.

The two indicators that are lagging behind the other three are new construction starts and employment among the 25- to 34-year-old age group, or the "millennials." New construction starts, tracked by the U.S. Census Bureau, experienced a year-over-year increase from 46 percent up to 53 percent, more than halfway back to normal, according to Trulia.

Employment among millennials, tracked by the Bureau of Labor Statistics, skyrocketed in Q4 2014 up to 46 percent from its Q4 2013 level of 26 percent. This is a key metric for housing recovery because new household formation, and subsequently home purchase, depends on this demographic being employed. About 76 percent of this group was employed, according to BLS's three-month average in December.

Despite the progress, housing recovery has a long way to go, according to Trulia's chief economist, Jed Kolko.

"Those young adults who took jobs in the past year aren’t yet buying single-family homes," Kolko wrote. "It typically takes years to save for a down payment and build up an income history. So those who got hired last year—or who will find work this year—won’t be buying homes for several years to come. Affordability is an especially big challenge for young adults. Prices are rising faster than incomes and millennials are clustering in less-affordable markets where buying is further out of their reach."