Upticks in new and existing home sales in February suggest the US housing market may be approaching bottom. Prices are close to their long-term averages in terms of multiple of buyers’ earnings, and may decline only modestly further. That’s good news for US banks’ asset portfolios – and the global economy.
After three years of relentless decline, demand in the US housing market appears to be rising towards supply. As the sharp rise in mortgage refinancing demonstrates, that’s partly an effect of historically low mortgage rates for prime credits eligible for a Fannie Mae or Freddie Mac guarantee. Nevertheless, the first stirrings of increased home sales should mark the beginning of a stronger overall trend. Only a surge in new home-building by housing companies wishing to convert their land banks into income could delay the market’s move towards equilibrium – thus the jump in February housing starts was disquieting.
House prices may well continue to decline for some months, if only because of large inventory and downward momentum in prices. Given the gigantic US budget deficit, interest rates might rise substantially from their current very low levels, which would reduce housing affordability and hence depress prices further. On the other hand, a bottoming of the economy combined with a revival of inflation would increase incomes and housing affordability.
A revival in home sales volumes and a slowing of price declines will put a floor under the value of the US financial system’s housing-related finance assets. That would be excellent news for US banks, the global financial system and eventually the global economy.
Once a firm bottom has been reached, it will be possible to unwind the current government subsidies to housing and the housing finance market without short-term adverse economic effects. Moves such as closing Fannie Mae and Freddie Mac and limiting the tax deduction for mortgage interest would become feasible. These would help reduce the long-term US budget deficit while restoring housing finance to a sound free-market basis and deterring a future housing bubble.
