US housing: Here’s a rarity: good news on the US housing front. New home sales rose 11 per cent last month. Existing home sales and housing starts each rose by 3.6 per cent from the previous month. But don’t get too optimistic. Housing starts are still far below previous cyclical lows while sales levels have been boosted by fiscal and monetary subsidies. These have brought a bottom, but won’t end housing’s prolonged difficulties.
June’s new home sales data looks encouraging until you compare it with previous housing bear markets. Corrected for population growth, June sales were still below the worst bear-market low since modern records began in 1959 — that of September 1981 when 30-year home mortgages cost 18.16 per cent. Similarly housing starts are still far below their lows in even the deepest previous recessions.
Moreover, the current uptick in new home sales has been achieved only through massive fiscal and monetary support, including over $1 trillion of Fed support for home mortgage securities, subsidies to refinance home loans facing foreclosure and an $8,000 tax break for first-time homebuyers that expires in November.
Those policies appear to have achieved their objective of putting a floor under house prices and the home sales market. That has considerable economic benefit, since continually falling prices pushed an increasing percentage of mortgage debt into a negative equity position. So the current housing rebound has to be taken with a pinch of salt. After all, the withdrawal of monetary or fiscal subsidy, both of which may eventually be necessary if unemployment continues its upward march, would again drag down housing.
Of course, there will be regional variations on this theme. States where overbuilding occurred and in which price declines have approached 50 per cent, such as Arizona, Nevada and California, are likely to suffer massive foreclosures and market distress before any uptrend takes hold. Macro-economic factors in states such as Michigan, Rhode Island and Oregon with unemployment above 12 per cent will stymie recovery.
On the contrary, some areas, like Texas, where the economy is relatively strong and prices have declined only modestly, or the Washington DC area, where government’s growth supports the market, may see a more rapid recovery.
Overall, housing’s stabilisation, in part by government fiat, was necessary to prevent greater economic collapse. But anyone expecting the housing sector to lead a recovery would be gravely mistaken.
