The recovery in the US housing market over the past few months is tapering off. The Case-Shiller Index of prices in 20 major cities rose by 0.3% in January, an eighth successive monthly increase. But another widely monitored house price gauge, the FHFA index, has been falling on an annual basis since late last year. Sales of existing homes fell for a third month in a row in February. New home sales also declined for the sixth month in seven and are now running at an annual rate of 308,000 – a record low.
What the commentators said
The US housing market “is still in a mess fully three years after the collapse”, said David Rosenberg of Gluskin Sheff. Government efforts to stem the tide have “at best cushioned the blow”. And now they are on the way out. A tax credit for first-time homebuyers is set to expire in June, while the Fed’s $1.25trn programme of buying up mortgage-related securities, to keep a lid on mortgage rates, ended this Wednesday.
The danger is that mortgage rates will head up again quite fast. Even if they don’t, “they have only one direction to go” longer-term as they are at historic lows, said Michael O’ Callaghan of Harvest Financial Group. Not that there’s much demand for housing debt among the deleveraging population, said Rosenberg. It’s now taking homebuilders 14.4 months on average to find a buyer once they’ve completed a unit.
On the supply side things look even worse. The government’s latest plan, aimed at helping borrowers in trouble, is to encourage banks to forgive some principal mortgage debt. But this, like previous measures, will “merely delay the reckoning”, said Lex in the FT. It’s hard to see it putting much of a dent in the sharp rise in troubled borrowers. The number who have missed a payment hit a record 13.6% in the fourth quarter, up from 12.8% in the third. Overall, one in seven households with a mortgage is either in the foreclosure process or in arrears.
All this points to yet more inventory coming on to the market. The backlog is already at around nine months of supply, compared to the six months consistent with stable prices. So with demand set to weaken further once the tax credit goes, and the housing glut “still near record highs” and rising as foreclosures mount, prices are set to fall further, said Patrick Newport of IHS Global Insight. That’s another reason to expect consumers, whose confidence has barely improved in a year, not to power the economy forward in the near future. That, in turn, will further undermine the “still fragile” household sector and hence the strength and sustainability of the overall economic recovery.