Boomtime is back! U.S. house price rises are accelerating, consumer confidence is at a five-year high, construction activity is picking up, and foreclosures and delinquency rates are falling.
During the year to end-Q1 2013, the S&P/Case-Shiller seasonally-adjusted national home price index soared by 10.17% (8.31% in real terms), the biggest year-on-year increase since Q1 2006, according to Standard & Poor’s. Quarter-on-quarter (q-o-q), the national home price index rose by 3.94% (3.3% in real terms) in Q1 2013.
All 20 U.S. major cities registered strong year-on-year house prices increases in March 2013. Pheonix recorded the highest annual house price increase, of 22.4%, followed by San Francisco (22.2%), Las Vegas (20.6%), Atlanta (19.1%) and Detroit (18.6%).
The Federal Housing Finance Agency (FHFA)’s house price indices were also encouraging. The U.S. seasonally-adjusted purchase-only house price index rose by 6.73% (4.93% in real terms) y-o-y to Q1 2013, the largest annual rise in house prices since Q2 2006. On a quarterly basis, the index increased by 1.95% (1.32% in real terms) in Q1 2013.
In April 2013, the median sales price of new homes sold in the U.S. increased by 14.9% y-o-y to US$271,600, according to the U.S. Census Bureau.
During the first four months of 2013, the total number of houses sold in the U.S. rose by 26.4% y-o-y to about 153,000 units, based on figures from the U.S. Census Bureau. Demand started to pick up in 2012 when the number of houses sold increased by 16.8% to 368,000 units from the previous year.
Construction activity is also on the rise. In 2012 from a year earlier:
U.S. home builder sentiment rose 7.3% from the previous year in May 2013, according to the National Association of Home Builders.
Foreclosures and home repossessions are also falling, partly due to the increased efforts by the government and state lawmakers to delay property seizures. In California, a new law prohibits lenders from pursuing foreclosure while the borrower is still renegotiating his loan terms.
The market is likely to remain strong. “The housing market continues to squeak out gains from already very positive conditions,” said National Association of Realtors (NAR) chief economist Lawrence Yun.
The U.S. economy grew by 2.2% in 2012, after real GDP growth rates of 1.8% in 2011 and 2.4% in 2010, according to the U.S. Bureau of Economic Analysis (BEA). Economic growth is expected to be 1.9% in 2013, and 2.8% in 2014, based on projections by the Organization for Economic Cooperation and Development (OECD).
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 (%)
(Jan 1996 – Mar 2006)
(Apr 2006 – Dec 2011)
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 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):
The ratio of houses for sale to houses sold in August 2012 was 4.6 - down from 6.6 the same month last year.
The 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 has begun to turn around.
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.
In 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.
The 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.
The 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.
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:
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.
The 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.
The 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:
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.
The 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.
During the first quarter of 2013, the U.S. economy expanded by an annual rate of 2.4%, lower than the 3% average projection by economists. Growth has mainly been fuelled by inventory accumulation, and by an increase in consumption and residential investment.
Economic growth is expected to slow to 1.9% for the full year 2013, but recover to 2.8% in 2014, according to the Organization for Economic Cooperation and Development (OECD).
Growth is being slowed by the U.S. government’s increasingly contractionary fiscal policy, which includes hiking taxes starting January 2013, and cutting the federal budget in March 2013. In addition, the ongoing Eurozone debt crisis is also adversely affecting the U.S. economy.
The federal deficit is expected to fall to about US$642 billion by end-2013 from its nosebleed US$1 trillion-plus heights in 2012, as tax revenues soar, according to the Congressional Budget Office. As a result, the shortfall is projected to drop from 10.1% of GDP in 2009 to about 4% of GDP in 2013 and finally to just about 2.1% of GDP in 2015.
With increasing investor confidence, the national jobless rate dropped to a four-year low of 7.5% in April 2013, according to the U.S. Department of Labor.
The overall inflation rate slowed to 1.1% in April 2013 mainly due to lower gasoline prices, according to the U.S. Department of Labor, well below the Fed’s 2% target, and below the 2012 inflation rate of 2.1%, and 2011 rate of 3.1%. The muted inflation could bolster the case for the Fed to continue its monetary easing.
With the government’s recent belt tightening, the question now is whether the housing recovery will continue to power economic growth?
In our view the likely answer is, yes. A house price collapse created the recession. It is important not to underestimate the significance of the housing market as a major influence on the U.S. economy. The strong housing recovery is likely to buoy economic growth in the U.S. for the medium term.
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