USA Market

YesNo-150x150The long-awaited U.S. housing market recovery

After almost four years of house  price falls, the much-awaited U.S.  housing market recovery is finally taking place: House prices are rising again…Demand is returning, with home sales increasing… Construction activity is picking up… The  delinquency rate is stabilizing… Foreclosures  are falling.

The U.S. seasonally-adjusted  purchase-only house price index rose by 4.75% (3.01% in real terms) during the  year to August 2012 – the largest annual growth in house prices since September  2006, according to the Federal  Housing Finance Agency (FHFA). On a quarterly basis the index increased by  1.48% (1.23% in real terms) in August 2012.

The  S&P/Case-Shiller home price indices were also encouraging:

  • The S&P/Case-Shiller       seasonally-adjusted composite-10 home price index rose 1.3% year-on-year       (y-o-y) to August 2012 (-0.39% in real terms).  Quarter-on-quarter (q-o-q), the index       rose by 1.64% (1.39% in real terms) in August 2012.
  • The wider S&P/Case-Shiller seasonally-adjusted       composite-20 home price index rose by 2% y-o-y to August, better than the       1.2% annual rise seen the previous month.

In August 2012, the median sales  price of new homes sold in the U.S.  increased by 17% y-o-y to US$256,900, according to the U.S. Census Bureau.

US house pricesForeclosed home prices are rising  rapidly. Average foreclosed-home prices rose by 12% month-on-month in September  2012, to US$194,681, according to RealtyTrac,  the  leading U.S.  online foreclosure properties marketplace. New foreclosed home listings fell by  40% in September 2012 from the previous month, to 106,328 units.

In  October 2012, the U.S.  home builder sentiment rose to its six-year high, according to the National  Association of Home Builders.

“We  outlined our view that the recovery in housing was likely to broaden in 2012.  So far, our forecast has been accurate,” said a recent Barclays Bank research  note. “What had been a narrow housing recovery driven by better multifamily  start activity amid a strong rental market has been complemented by improved  homebuilder sentiment.”

Phoenix leads the recovery!

During the U.S. housing boom (1996-Q1 2006), all 20 main U.S.  cities experienced spectacular house price rises. Los   Angeles registered the biggest house price rise of 268.1%, followed  by San Diego (250.1%), San   Francisco (227.8%), and Miami  (214.6%).

In Q2 2006, house prices started to  fall. From Q2 2006 to Q4 2011, the S&P/Case-Shiller composite-10 home  price index plunged 34%. Of the ten largest U.S.  metro areas, Phoenix registered the biggest drop  (down 55.5%), followed by Detroit (-44.4%), San Francisco (-41%), Los Angeles  (-40.6%), and San Diego  (-39.9%).

Now Phoenix is leading the recovery.  Phoenix  house prices rose 18.8% y-o-y to August 2012, its fourth consecutive month of double-digit  y-o-y house price increases.  Seventeen  of the 20 largest cities in the U.S.  saw house price rises in August, from a year earlier.  Only three cities have seen their house prices  fall during the year to August 2012—Atlanta  (-6.1%); New York (-2.3%); and Chicago (-1.6%).

HOUSE PRICE CHANGE (%)

US CITIES         Housing boom (Jan 1996 – Mar 2006)       Housing  crash, global crisis        (Apr  2006 – Dec 2011)      2011       (y-o-y)       August 2012   (y-o-y)
New    York 173.1% -24.8% -3.2% -2.4%
Los    Angeles       268.1% -40.6% -5.2%       2.2%
Chicago       99.4% -34.5% -6.4% -1.7%
Phoenix       185.8% -55.5% -1.2%       18.8%
San    Diego       250.1% -39.9% -5.4%       1.9%
Dallas       -7.1% -1.3%       3.6%
San    Francisco       227.8% -41.0% -5.3%       5.3%
Detroit       73.7% -44.4%       3.6%       7.5%
Boston       154.7% -16.7% -2.6%       1.7%
Seattle       134.7% -23.8% -5.5%       3.3%
Composite-10       194.3% -34.0% -4.1%       1.3%
Composite-20       -33.8% -4.0%       2.0%
Source: S&P

During the year to August 2012, the  Mountain region registering the biggest house price increase of 11.4%. Other  strong regions include the Pacific (8.1% y-o-y), West South Central region  (5.3%), South Atlantic region (4.6%) and the  West North Central region (4.4%).

Demand  rising again fast

Demand for houses is rising. The  number of houses sold (seasonally-adjusted) during the first eight months of  2012 rose 20.8% compared with the same period last year, according to the U.S.  Census Bureau.

January to August 2012 houses sales  (compared to same period last year):

  • Western region: sales up 37.6%
  • Northeast: sales up 27.1%
  • Midwest:       sales up 18%
  • South: sales up 13.5%

The ratio of houses for sale to houses  sold in August 2012 was 4.6 – down from 6.6 the same month last year.

US houses soldThe total number of new houses for  sale was at a record low at the end of August 2012, at 143,000 units. About  55.9% of the new houses for sale are in the Southern region, 19.6% in the West,  13.3% in the Midwest, and 11.2% in the  Northeast.

Residential  construction strongly rising

Residential construction has begun  to turn around.

  • For the       first three quarters of 2012, the total number of new privately owned       housing units completed increased 8.9% from the same period last year, to       462,100 units, according to the US Census       Bureau.
  • The       total number of housing starts increased 26.7%, to 582,500 units during       the year to September 2012.
  • The       total number of houses under construction rose by 13.2% y-o-y to 4,275,300       units during the first nine months of 2012.

From 1990 to 2007, the total number  of housing starts averaged 1.5 million units per year. However due to the  global crisis, housing starts fell to 1.1 million units in 2008, 794,400 units  in 2009, 651,700 units in 2010 and 584,900 units in 2011.

US construction new privately ownedIn the second quarter of 2012, the U.S. housing inventory  increased 0.4% to reach 132.72 million. Of these, 86% were occupied, and the  remaining 14% were vacant. About 66% of the occupied housing units were  owner-occupied; the other 34% were rented.

Delinquency  rate stabilizing, foreclosures falling

US delinquency rateThe residential real estate  delinquency rate has stabilized, another clear signal of a housing market  recovery.  In Q3 2012, 42 U.S. states  showed a drop in delinquency rates. California  and Arizona,  two of the hardest hit by the global financial and economic crisis, showed the  best year-on-year results. However, the national delinquency is still  exceptionally high compared to the 1.39% delinquency rate registered in Q4  2004. The delinquency rate of outstanding residential real estate loans was  10.61% in Q2 2012, down from 10.69% in Q2 2011, according to the US Federal Reserve  System.

In addition, the total number of  foreclosures (default notices, scheduled auctions, and bank repossessions  combined) in September 2012 fell to their lowest level in five years, at  180,427 units, according to RealtyTrac.

“The  five-year low, combined with the fact that the year-over-year decrease in  foreclosures was in its twenty-fourth straight month, is evidence that we´re  past the worst of the foreclosure crisis,” said RealtyTrac vice president Daren  Blomquist.

In Q3  2012, San Francisco had seen the biggest drop (-36%)  in foreclosure activity from a year earlier, followed by Detroit  (-31%), Los Angeles (-29%), Phoenix  (-27%) and San Diego  (-26%).

“Two-thirds  of the nation’s largest metros posted decreases in foreclosure activity in the  third quarter,” said Blomquist.

Mortgage  interest rates falling

US interest ratesThe U.S. Fed’s  key rate remained unchanged at 0.13% in October 2012, having been cut in  December 2008. The rate can hardly fall further.

The fed  funds rate peaked at 5.25% in August 2007.

As of  October 2012, the average interest rate for 30-year Fixed Rate Mortgages (FRMs)  was 3.38%, down from 4.07% the same month last year, based on figures released  by Freddie Mac. Likewise, the  average rate for 15 year FRMs fell from 3.35% to 3.69%, while the average rate  for 5 year FRMs fell from 3.03% to 2.74%.

One-year  adjustable rate mortgages (ARM) had an average lending rate of 2.59% in October  2012, down from 2.92% in October 2011.

Stimulating  the housing market

A new mortgage relief plan, actually  a revamp of the existing Home Affordable Refinance Program (HARP), was  announced by President Barack Obama in October 2011, to stimulate the economy  and to revitalize the housing sector.

HARP’s previous maximum  loan-to-value (LTV) ratio has now been scrapped, and the 2% fees paid by some  high-risk borrowers have been reduced or abolished, while HARP’s deadline has  been extended to December 31, 2012.

To be eligible for the HARP  refinance program:

  • The mortgage must be owned or guaranteed by Freddie Mac       or Fannie Mae.
  • The mortgage must have been sold to Freddie Mac or Fannie       Mae on or before May 31, 2009.
  • The mortgage cannot have been refinanced under HARP       previously, unless it is a Fannie Mae loan refinanced under HARP from       March-May 2009.
  • The current LTV ratio must be higher than 80%.
  • The borrower must have no late payment in the past six       months, and no more than one late payment in the past 12 months.

In another stimulus measure, the Federal  Reserve Board said in September 2012 that every month, it would buy US$40  billion in mortgage-backed securities.

Mortgage  market still shrinking

US mortgage debtsThe U.S. mortgage  market has been shrinking. In Q2 2012, the size of the mortgage market was  equivalent to 84.4% of GDP, down from 103% of GDP in 2009, according to the  Fed.

The total mortgage debt outstanding  fell by 2.4% to US$13.216 trillion in Q2 2012, from the same period last year.

In Q2 2012, the homeownership rate  (seasonally-adjusted) in the U.S.  was 65.6%, the lowest since Q1 1997.

US homeownership

Rental  vacancies falling

US rental vacancyThe median asking rent in the U.S. fell by  0.7% to US$716 per month from the previous quarter in Q2 2012, but was still  4.7% higher than the same period last year, according to the U.S. Census  Bureau’s Housing Vacancy Survey.

In Q2 2012:

  • In the       Northeast region, the median asking rent was 5.8% lower the previous       quarter – but 1.5% higher than a year ago, at US$878 per month.
  • In the Midwest, the median asking rent fell by 1.3% q-o-q,       but rose by 2% y-o-y to US$599 per month.
  • In the       Southern region, the median asking rent rose by 1.4% q-o-q, and was also       up 3.4% y-o-y, to US$669 per month.
  • In the       West, the median asking rent rose by 6.5% q-o-q, and was also up 7.3%       y-o-y, to US$911 per month.

The rental vacancy rate in the U.S. fell  to 8.6% in Q2 2012, from 9.2% in Q2 2011, according to the U.S. Census Bureau.

Rents  rising faster than house prices

US house prices rentsThe house price-to-rent ratio has  been falling since 2008.  From 2008 to Q2  2012, house prices have plunged deeply, while median rents have been more or  less static, according to the U.S. Census Bureau.

A falling price-to-rent ratio is a  signal that the market has good potential for recovery, in the long term.

‘Fiscal  cliff’ endangers growth

US gdp unemploymentThe U.S. economy  faces many challenges.  President Barack  Obama, who won a second-term in office during the 2012 U.S. Presidential  Elections held last November 6, 2012, faces  urgent tax and spending issues that if mishandled could plunge the largest  economy into another recession.

The unemployment rate fell to 7.8%  in September 2012, the first time below 8% since President Obama’s first month  in office, and down from its peak of 9.45%.

But  recovery is fragile.  Real GDP growth is  expected to be between 1.7% and 2% in 2012, down from an initial Fed forecast  of 2.4%. The downgrade reflects a sluggish first half, and Superstorm Sandy,  which devastated the Northeast in late October 2012.  Another  danger sign:  inflation was 2% in  September 2012, up from 1.7% in the previous month – the highest inflation since  April 2012.

The most troubling problems are the  expiring Bush era tax cuts, which overlap with automatic spending reductions, a  combination known as the “fiscal cliff”, which could endanger even the present (relatively  slow) GDP growth rate.

President Obama has been clear in  arguing that he will not accept any extension of tax cuts for the wealthiest  Americans.  But to avoid the fiscal  cliff, a combination of higher taxes and reduced spending is needed. The net  result is likely to slash GDP growth by 1% to 1.5% next year, according to ING Investment Management.

The question is whether the housing  recovery will continue to power growth, despite all this?

In our view the likely answer is,  yes.  A house price collapse created the  recession.  A continued house price  recovery is likely to pull the U.S.  out of recession. It is important not to underestimate the significance of the  housing market as a major influence on the U.S. economy.  We believe that the housing market is in  strong recovery, and that it will pull the U.S. economy up with it.

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