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Housing Recovery's Missing Link

Stocks in this article: XHB IYR

NEW YORK ( TheStreet) -- Housing is 64% back to "normal", the highest level since the recession began according to the July Housing Barometer from Trulia

The Barometer measures three housing indicators -- construction starts, existing home sales and delinquencies -- in terms of where they are now relative to their worst point in the crash and their long-term "pre-bubble normal levels."

Existing-home sales have posted a strong recovery, rising during in July to their second-highest level in six years. At a seasonally adjusted annualized rate of 5.39 million units, existing-home sales are just shy of the normal 5.5 million level, or 94% back to normal, according to the Barometer.

Fewer borrowers are defaulting on their mortgage loans. The percentage of borrowers who are behind on their payments or in foreclosure fell to 9.23%, the second-lowest level in almost five years.

That is still a very elevated level for late payments. Delinquency rates are only 56% back to normal (5.25% being the normal rate), so the pain from the crisis is not yet over.

Construction starts are, however, the big laggard. While starts rose 6% in July from June to a seasonally-adjusted annualized rate 896,000, this is only 41% back to normal. While home builders remain optimistic about the recovery, the industry is still recuperating from the crisis. A shortage of manpower, higher material costs and tight credit are curtailing the number of new homes being built.

As a result, new home sales also remain well below normal.

According to Trulia economist Jed Kolko, housing is now in the third phase of recovery. The first phase began in 2009, when sales and construction starts ended their "free fall" and began to start to climb from the bottom.

In the second phase, home prices finally hit bottom in early 2012 and started their rebound. Existing homes are now just 5% undervalued.

Now in the third phase, inventory is finding its bottom and starting to move up.

For housing to enter its fourth stage of recovery, construction starts and new home sales will have to normalize. In order for that to happen, household formation has to increase at a faster pace than the normal rate of 1.1 million a year.

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