The Housing Market According to the White House

In the White House's report on the economy there is a section on the housing market. Here is the text:

Housing Prices

"During the past five years, home prices have risen at an annual rate of 9.2 percent. This increase was largely supported by two factors: first, an increase in housing demand, driven by a rise in nominal per capita disposable income of 3.4 percent per year; second, a decline in the cost of financing house purchases, due to a drop in the monthly payment on 30-year fixed-rate mortgages of 4.3 percent per year. Housing demand was also boosted by increased household formation and a strengthening job market. Supply constraints, due to limits on the supply of buildable land in some areas, also contributed to rising prices over the past five years. After falling during 2004, mortgage rates were roughly flat at 53⁄4 percent in the first three quarters of 2005, and then edged up along with other long-term interest rates in the fourth quarter. As a result, a well known measure of housing affordability has now fallen to about its average level over its 34-year history."

"To gauge the extent to which house price increases have reflected fundamentals, some studies compare housing prices to rents. The rent-to-price ratio is a real rate of return on housing assets in the same way that the earnings-to-price ratio measures the real rate of return on corporate stocks. Viewed as an asset, a home should bear a real return similar to the real return available
on alternative assets, such as stocks and bonds. As real interest rates have fallen in the United States and in most other Organization for Economic Cooperation and Development (OECD) countries, the rent-to-price ratio for housing has likewise fallen across a broad range of OECD countries. A recent OECD paper concluded that the decline in the rent-to-price ratio in the United States from 2000 through 2004 was roughly consistent with the decline in interest rates over the same period."

Residential Investment

"In response to strong demand and the consequent rise in prices, builders began construction on more than 2 million new homes during 2005, one of the highest rates of homebuilding on record. Similarly, residential investment, at 6 percent of GDP in 2005, was at its highest level since 1955. During 2005, growth of residential construction contributed about half a percentage point to real GDP growth. Homebuilding in 2005 was slightly in excess of the pace of about 1.9 million starts per year that some economists have estimated is compatible in the long run with U.S. rates of household formation and other demographic influences."

"During the next five years, the Administration expects the pace of homebuilding to decrease gradually because of demographic trends and slowly rising long-term interest rates. A gradual slowing of homebuilding appears more likely than a sharp drop because the elevated level of house prices will sustain homebuilding as a profitable enterprise for some time. On balance, residential investment is not projected to contribute to real GDP growth during the four quarters of 2006; in subsequent years, it is expected to subtract a bit from overall growth. "