In a recent TV interview, Alan Greenspan made the point that the US economy had never recovered without a recovery in construction and housing activity - and the associated increase in construction employment. Ben Bernanke, in his 29 August 2011 Jackson Hole address, also made the point that the US housing sector has been a significant driver of recovery from most recessions in the United States since World War II.
Furthermore, with an overhang of distressed and foreclosed properties as well as tight credit conditions the rate of new home construction has remained at less than one-third of its pre-crisis level. The low level of construction has implications not only for builders but for providers of a wide range of goods and services related to housing and homebuilding.
It is almost 3 years since Lehman Brothers filed for bankruptcy protection (15 September 2008). The US housing market was at the centre of the Global Credit Crisis – so how is the US housing market doing now? In order to answer the question, we have simply trawled through the vast array of US housing data, and have highlighted the key findings (supported by a number of charts) below:
- US residential investment actually fell to a 60 year low of 2.2% of GDP in Q1 2011 from a 60 year peak of over 6% of GDP in 2006. Residential investment is typically a leading component of US expansion, responding strongly to the stimulus provided by low interest rates early in the business cycle.
On average, housing activity has contributed 0.6 percentage points to real GDP growth in the two years following the past six recessions. However, its sustained decline from the start of the current recovery has meant that residential investment has contributed negatively to GDP growth.
- Housing starts are currently 71% below the average level achieved in 2005, and still essentially around the lowest level ever recorded. The data series starts in 1959. Housing starts appears to have stabilised, but there has been no discernable improvement in activity levels for the past three years.
- Housing permits are also 71% below the average level achieved in 2005, and also at around the lowest level ever recorded. The data series starts in 1960. Building permits appear to have stabilised, but there has been no discernable improvement in activity levels for the past three years.
- New home sales are more than 76% below the average level achieved in 2005, and also at around the lowest level ever recorded. The data series starts in 1963. New sales still appear to be trending lower.
- Existing home sales have been fairly volatile in the past three years, significantly influenced but the various incentives/initiatives to encourage housing activity. Overall, though, existing home sales remain depressed, but have not slumped to record lows.
- Home ownership levels are still trending lower, and are currently at 65.9% (i.e., 65.9% of all households own their own home). This is well below the peak ownership percentage of 69.2% achieved in late 2004. The current ownership rate is back to the level achieved in 1998.
- According to the US Census Bureau, there were 14.165 million vacant homes in the US during Q2 2011. As a point of reference there are currently 131.173 million homes in the US. Around a half of the vacant homes are held off the market (mostly in the hands of the banks). More positively, the number of vacant homes have been trending lower and are current 254 000 below the peak in Q2 2010.
An excess supply of housing is a key reason for the sustained drop in residential building activity. Residential construction remains extremely weak despite low interest rates because there is an excess of homes and hence little need for new construction.
- The states most impacted by the housing over-supply are Florida, California and Nevada. In other states (Texas and New Mexico) there is actually a housing shortage. However, residential investment on a national level will not really improve until employment levels in those large states with excess home vacancies improve. These states have unemployment rates well above the national average (Nevada 12.1%, California 11.7%, Florida 10.6%), while those states with housing shortages have unemployment rates below the national average (New Mexico 6.9%, Texas 8.0%).
- House prices remain under pressure and have continued to decline on a monthly basis, falling by a further 4.5% over the past year. In total, house prices have declined by more than 31% since peaking in 2006. In some cities, house prices are down more than 50% from their peak.
- As would be expected, mortgage applications for purchase have declined dramatically relative to their peak in 2005. Unfortunately, the number of applications continues to fall despite the incredibly low level of interest rates (reflected in low bond yields).
- Mortgage refinancing activity has improved somewhat in recent weeks, especially after the Federal Reserve announced that interest rates would remain extremely low until mid-2013. Overall, though, refinancing activity has been fairly volatile.
- The housing affordability index remains extremely high, although it is currently slightly below the all-time high. (The higher the index the more affordable housing has become). The affordability index is comprised of three variables namely: house prices, the cost of finance and income levels. Unfortunately, although the affordability index is extremely favourable, it has not yet lead to an improvement in housing activity, which highlights that the US economy is facing a crisis of confidence.
- Housing now represents only 22.4% of the household sector’s total assets. This compares with over 30% in 2006. Housing has historically provided a crucial underpin to the wealth of the US consumer. Clearly this base of wealth has been shaken.
Overall, it is clear that the US housing market remains extremely weak. Housing activity is moving sideways, but at historically depressed levels, and the massive over-supply of housing is keeping prices under pressure despite exceptionally low interest rates.
One of the factors that have frustrated the recovery in the housing market has been the lack of finance, despite the low interest rates and additional liquidity from the Fed. Banks have tightened their credit requirements, which has resulted in an increase of denial rates for housing loans. Housing loan denials rose to around 22% to 26% after the housing crisis and into the recovery. This compares with 16% in the early 2000s. The restricted access to finance for home purchases, combined with the renewed decline in home prices, means that households will continue to find it more attractive to rent than to buy a home; which is not really an ideal situation if you are trying to boost housing development.
The recovery in the housing market is also being curtailed by the high unemployment rate among young adults. The past recession resulted in a dramatic increase in the unemployment rate for people aged 20 to 29. In fact, the official unemployment rate for young adults has risen from around 6.5% in 2007 to a peak of nearly 14% in late 2010. While the unemployment rate for young adults has eased recently, it remains extremely high by historical standards and is actually 4.4 percentage points above the 25-year average rate of unemployment for this age group.
Logically, if this unemployment rate could be reduced to around the 25-year average or lower, the boost in demand (including pent-up demand) for housing would be significant and should absorb a significant portion of the current housing over-supply, especially if affordability levels remain as favourable as they are now. Unfortunately, this scenario could still take a number of years to manifest, implying that the US housing market will remain structurally weak for a number of years; although it is probably past the worst.
It also implies that housing activity is unlikely to provide the much needed boost to the US economic recovery, as it has done following each of the previous 6 recessions.
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