Home sales rose to their highest level since before the financial crisis and were 25% higher than a year earlier, the Census Bureau said last week.
But while news of a 592,000 annual rate was positive, economists cautioned not to break out the champagne for the housing market quite yet.
"This maybe is an important milestone for the housing recovery, but historically, it is well short of what should be normal," said Lawrence Yun, chief economist for the National Association of Realtors.
Considering population and job growth, new home sales should be around 800,000 or 900,000 a year, according to Yun. During the boom years, new home sales topped out at nearly 1.3 million in 2005. But that was "unsustainable," Yun acknowledged.
Other market indicators show the housing recovery is progressing, but still a long way off from normal.
Single-family starts registered a 778,000 seasonally adjusted annual rate in June, up 4.4% from the prior month and up 13.4% from June 2015.
That's moving in the right direction, said Frank Nothaft, senior vice president and chief economist at CoreLogic.
"But they are still running at a recession level. It is not running at a depression-level like five years ago. But we still have single-family starts below a million," Nothaft said.
While home ownership continues to struggle, there has been substantial growth in rental household formations. Multifamily construction in particular has been on a tear, while the homeownership rate has fallen to just below 63%, a 50-year low.
"I would not be surprised if we saw homeownership rates fall a little bit further," said Rick Sharga, chief marketing officer at Ten-X, an online marketplace for residential and commercial real estate.
The housing market is still dealing with tight credit, low inventories and affordability issues because wage growth hasn't kept pace with house price appreciation.
"Sales continue to go up and house appreciation is moderating," Sharga said. "And we are seeing good news with job creation and wage growth. Over time, it will correct itself."
The growth in single-family starts is expected to outpace the growth of multifamily starts this year. "We are still expecting negative growth for multifamily starts, although at elevated levels," said Robert Dietz, the chief economist for the National Association of Home Builders.
The group expects 10% growth in single-family starts this year and just under 800,000 units.
Economists at JPMorgan Chase Bank have also noticed that the moderation in multifamily growth has been accompanied with "a shift toward single-family units," which should provide a boost to the housing market and economic growth.
That shift will increase residential investment, which will have "favorable implications for GDP growth," according to Daniel Silver, a JPMorgan economist.
"Investment associated with a single-family unit is typically about twice as large as the investment with a multifamily unit," Silver said in a July 22 JPMorgan US Weekly report.
Yun expects the housing market will continue its slow recovery over the next two years. But there is a chance the recovery could become much stronger, he said in an interview, and boost economic growth.
The National Association of Realtors tracks existing home sales, which hit a seasonally adjusted annual rate of 5.57 million in June — the highest sales pace since February 2007.
Considering population growth, existing home sales should be closer to 6 million or slightly above. "So potentially there could be another 10% growth in existing home sales," Yun said.
Meanwhile, more first-time buyers are entering the market, according to the Mortgage Bankers Association, another good sign.
"For the last year, MBA's survey of mortgage applications has shown a year over year increase in applications for loans under $150,000, which indicates that first-time homebuyers are showing up in greater numbers," said Lynn Fisher, MBA vice president of research and economics.
The Realtors reported that 33% of existing homebuyers in June were first-timers — the highest percentage in four years.
"The current low mortgage rates are a powerful incentive for potential buyers to enter the market," Nothaft said.
CoreLogic economists are also seeing an increasing use of leverage by homebuyers who are taking out 95% and 97% loan-to-value mortgages. "It is a sign the first-time buyers are coming back into the market," Nothaft said in the interview.
In 2009, single-family starts fell to a multi-decade low of 445,000 units. Single-family starts just hit a 778,000 seasonally adjusted annual rate in June.
"Even though the builders are building more, it is still subpar performance," Yun said. The accumulation of under-production over the past few years has created a "bottleneck" in the housing market.
"Builders need to build more so existing homeowners will trade up and release their existing homes onto the market," he said in the interview.
The Realtors would also like to see more construction of affordable, starter homes. "The price gap between new and existing homes has really widened," Yun said.
"We expect builders to continue to ramp up production," said Mark Vitner, managing director and senior economist at Wells Fargo Securities. "We are looking for a 10% increase in single-family starts this year and a 9% rise in 2017."
Vitner noted builders continue to be constrained by a shortage of buildable lots, increased regulatory burdens, including the zoning and entitlement process, along with higher labor and material costs.
However, homebuilders are becoming more confident, according to IHS Global Insight U.S. economist Kristin Reynolds. And buyers are lining up to sign contracts on homes yet to be built.
"The number of new homes offered for sale and sold as not yet started are double-digits ahead of last year and reached new highs not seen since 2008 and a year earlier," she wrote in a July 26 report.
"The market for new homes is looking solid," Reynolds said. "We expect new home sales to make gains throughout 2016."
