Remember where the global recession all began? It’s perhaps a distant memory now, but it was early in 2006 that US housing markets first faltered, setting off successive waves of weakening. In recent days, a bevy of positive international economic indicators has hit the airwaves, and many analysts are now seeing the recession’s imminent end. Are US housing markets once again leading the way?
Without a doubt, they are stoking the recent wave of optimism. Sales of both new and existing homes were up sharply in June, posting the best results in seven months. Prices for existing homes jumped for the second consecutive month in June to the highest level since October 2008. And for two months running, the inventory of housing units for sale has edged downward. This has helped construction of new units to get some recent lift from the perilous lows broached in the spring.
Recent gains make sense. Although average prices have risen, they are still on average about 21% below peak levels, and in some regions are far lower. Bargains are tempting some buyers back into the market. At the same time, carrying costs are lower. Mortgage rates have tumbled over the past year, and for those who qualify, the combination of lower prices and financial terms is quite attractive.
Also, housing construction was due for a rise. Few thought that activity could sink to April’s paltry 479,000 units in the first place, much less stay at that level. Construction has now been below 1 million units for a year, and with sustainable building levels estimated at about 1.6 million units, consistent under-building has put a dent in the swollen excess of US housing units available.
But despite the market’s best efforts, the excess in the US housing market remains massive. By our calculations, it peaked at almost 8 million units in April, 2008. It has dropped fairly consistently since then, but is presently estimated at just over 5.6 million units. This excess is more than a year’s worth of sales at the current pace of market activity. By this measure, market balance is still along way off.
While recent market movements are encouraging, it stands that sales activity will have to increase a lot more dramatically, and be sustained at higher levels, in order to have a significant effect on housing construction activity – a key bellwether of sustained recovery in the broader economy. A pre-emptive rise in construction levels will only exacerbate an already-swollen excess.
Will sales pick up soon? Only time will tell. US consumers are still reeling from the effects of lower house prices and high debt levels. Savings rates have risen dramatically in recent months, and are still on the rise. This is helping consumers’ balance sheets, but limiting their buying activity. Complicating matters is the continued rise in unemployment, which is suppressing confidence and promising to keep up the financial pressure on consumers for months to come. Public stimulus is likely to provide temporary relief, but consumers are unlikely to pile into housing until they are convinced that a more lasting recovery has taken hold.
The bottom line? US housing markets are still out of balance, and are not likely to post meaningful gains until the first half of 2010. Given that this a key leading indicator of US – and by extension world – economic recovery, this sub-market suggests that global conditions will remain slow for awhile yet.