The long-awaited U.S. housing market recovery

November 19, 2012


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 prices

Foreclosed 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%).


Housing boom
(Jan 1996 – Mar 2006)
Housing crash, global crisis
(Apr 2006 – Dec 2011)
August 2012
New York
Los Angeles
San Diego
San Francisco
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 sold

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 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 owned

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.

Delinquency rate stabilizing, foreclosures falling

US delinquency rate

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.

Mortgage interest rates falling

US interest rates

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.

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 debts

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.

US homeownership

Rental vacancies falling

US rental vacancy

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:

  • 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 rents

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.

‘Fiscal cliff’ endangers growth

US gdp unemployment

The 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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