Activity in the national housing market is heating up. Existing home sales surged in the third quarter of this year to a level last experienced in the booming housing market of the late 1970s.
New-home sales also rose strongly in the quarter, pushing down inventories of new homes to levels consistent with only the best of times. This has supported a rebound in home building, with housing starts rising to their highest level since before the 1990-1991 recession.
Steady, albeit slow, improvement in the nation's labor markets is also supporting home-buying. Despite ongoing corporate layoffs, over 1.5 million jobs have been created this year.
The only impediment to housing expansion is stubbornly low levels of consumer confidence. But it is important to look at what consumers do rather than at what they say.
Housing markets are also being supported by relatively attractive home prices. Since the beginning of the 1990s, existing and new home prices have risen at annual rates of 3.3% and 1.8%, respectively.
Over the same period, consumer price inflation has averaged 4.1%. Weak price appreciation mixed with falling interest rates has resulted in rising affordability.
Given the rising demand for housing, what are the prospects for house price appreciation in 1994? Although housing market activity is expected to remain strong next year, home prices will appreciate only a modest 4.1% in 1994 after rising 3.3% this year. However, nearly all of the nation's major metropolitan areas will experience rising prices in 1994.
Home values in much of California will stop deteriorating, with the exceptions of Los Angeles and Anaheim-Santa Ana.
More stable California home prices are clearly dependent on an end to the hemorrhaging in the state's labor markets. More stable California home prices will also have a beneficial impact on the state's economy through the so-called wealth effect.
The Northeast economy has also been hampered by the impact of declining home values on household wealth since the turn of the decade. As in California, home values will stabilize in most of the Northeast in 1994.
In contrast to California and the Northeast, rising home values have been supporting the economies of the Mountain region and the South.
The most significant impetus for further home price appreciation is strong growth of population and of household formation. In the Mountain region, household growth is being spurred on by in-migration from displaced Californians. In the year ending in June 1993, the Mountain states enjoyed net in-migration from California of close to 60,000 people.
In-migration to the South will also continue to improve in 1994. With housing markets and home prices beginning to stabilize throughout the Northeast, many households that had put off moving will begin to move again, and many will move to the South.
The Midwest, which has enjoyed relatively steady home price appreciation over the past four years, will continue to enjoy modest home price appreciation in 1994. Steady improvement in the region's large industrial base will result in job and income growth that will support housing demand.