Property bulls are jumping for joy at the news that US housing starts rose 4.5% in December, the second monthly rise in a row. “The housing sector may have troughed,” announced Barron’s. Naturally, the National Association of Realtors (NAR) agreed, stating that “after bottoming in the fourth quarter of 2006, existing-home sales are forecast to gradually rise through 2007”. The NAR is even more optimistic about new-builds, expecting a complete sales turnaround “by summer”. And the NAR isn’t alone.
A recent survey on WSJ.com showed that almost two-thirds of economists thought “the worst of the residential real-estate slump was history”, says James Grant in Forbes. On the surface, the numbers back this optimism up – the Census Bureau estimates that there were 545,000 new homes for sale at the end of November, a distinct improvement on July’s total of 568,000.
The outlook for the US housing market is not as rosy as it seems
But look a little deeper and you get a nasty surprise. These figures don’t take into account contract cancellations (people who pull out after signing a contract to buy). The New York Times’s Daniel Gross warns that “cancellations have risen to epidemic proportions”, meaning the Census Bureau’s figures could be skewed by as much as 20%.
A survey of 30 large builders by the National Association of Home Builders reveals that in November cancellations made up 38% of gross sales, compared with 26% in November 2005, as would-be buyers pull out on fears the housing market has further to fall. And that is despite a 3% drop in house prices last year: clearly, the masses don’t think the housing market has bottomed out yet, whatever the NAR says.
And let go of hopes for a soft landing. As the former chief executive of Home Depot, Robert Nardelli, says, “if this is a soft landing, it’s not a plane I want to be riding on”. The retail chain is struggling with people spending less on their homes and construction plummeting – new house construction is currently 28% lower than this time last year. History also suggests that the US housing slump is far from over. Housing corrections usually last around 27 months, warns BusinessWeek’s Mara Der Hovanesian, and the economy tends to be hit at the same time. “In six of the seven cycles, when starts [of new homes] fell more than 25% from their most recent peaks, the economy tanked.” So far, single-family housing starts are down 35% – so if history is any guide at all, things aren’t looking good.
Other worrying signs for the US housing market
And despite the spin from the NAR, those working in the industry know it. The sight of a Kiplinger’s supplement offering advice on how to sell a home (dress it nicely, put coffee on to boil, tidy up the garden, and so on) is a glaring signal that the market has turned nasty. Only a few short months ago anything that appeared on the market was snapped up in minutes. No coffee necessary. And estate agents across America are invoking old tricks to shift houses. BusinessWeek reports that some agents are removing houses from the market only immediately to re-list them in a move to disguise how long houses have been for sale. Other agents are giving away plasma TVs or offering to pay buyers’ utility bills for two years as incentives. The mortgage lenders are also getting worried – one Californian lender is now offering a mortgage with ‘no mortgage payments for 12 months’. As the Big Picture’s Barry Ritholtz points out, the availability of free houses has to be a sign of a desperate sector.
Some commentators have suggested that recent price falls, combined with the slump in the value of the dollar against the pound, makes this a good time for UK investors to go bargain-hunting in popular holiday destinations, such as Florida. We think the US housing market has a long way to go yet before prices have reached rock bottom – but for those who simply can’t wait, there’s a sample of what you can currently get for your money in the box below.
What you can buy now in Florida
Boathouse, Melbourne, Florida.
A four-bedroom 1930s boathouse which is an hour’s drive from the Kennedy Space Centre. £716,900 Paradise Properties +1 321 773 1892.
8310 E 249th St, Florida.
This four-bedroom lakeside home is set in over five acres of land and surrounded by pine forests. £419,000 Savills 020-7016 3744.
Loggerhead Island, Satellite Beach, Florida.
A luxurious four-bedroom house in a gated community set on a deep-water canal. £453,700 Mayfair International Realty 020-7408 1400.