Has the US Housing Market Really Bottomed?

The chances are you will already have heard some of the mounting evidence to suggest that the US housing market is bottoming, and probably some of those reports that pour water on the optimism...

As you are reading an article on the US housing market, the chances are you will already have heard some of the mounting evidence to suggest that the US housing market is bottoming, and probably some of those reports that pour water on the optimism. So now is the time to look at whether or not the market has actually bottomed.


Firstly let's look at the latest evidence that the market has bottomed. The greatest of the latest data has to be the latest release of the S&P/Case-Shiller index, which is the most widely respected measure of US house prices and found them to be 0.5% higher in June than the previous year across the 20 cities it covers. This marked the first year on year growth since September 2010, when the market was being buoyed by the tax credit scheme. The index also showed that prices had grown on a monthly basis in all 20 cities for the second month in a row.

The first year on year growth in just under a year followed the largest quarter on quarter growth in 7 years, with prices up 1.8% on the quarter in Q2 according to the Federal Housing Finance Agency.

Perhaps more interestingly we also had a survey this week telling us that investors are starting to buy less because prices are rising and leaving them with fewer deals. According to the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey, investors were responsible for 21.9 per cent of house sales in America in July, down from 23.5% in June and from a 2 year peak of 25.3% in May. The survey is based on a 3-month moving average. The report contained many statements from agents across the US reporting that rising prices have caused an exodus of serious investors, leaving only novice investors in their wake.

This is on top of months of all the metrics turning positive, rising existing home sales, rising new home sales, rising prices etc etc etc.


Bloomberg is brimming with the positivity, but Forbes has gone the pragmatic route of laying out the bumpy road ahead. What market recovery? Asks Forbes columnist Agustino Fontevecchia, pointing out that distressed sales are still high and the shadow inventory still huge.

The Fontevecchia story, as well as several others in Forbes all put the price rises down to falls in the number of distressed sales, which now account for 25% of all house sales down from 50%. Fewer distressed sales means fewer discounted sales, which has an obvious upward impact on house prices. However,  Fontevecchia also displays how the number of distressed sales also affects the discount given on distressed sales, quoting Goldman Sachs figure of 20% average discount for May, down from 27% running previously according to John Campbell, chair of Harvard University's economics department.

You may be wondering why falling distressed sales is a problem for the market, and on its own it isn't, but when you say shadow inventory in this context it brings in the uncertainty. The shadow inventory is the number of houses facing repossession and/or distressed sale, but on which proceedings have yet to begin. No one knows for sure how big this inventory is across the US, but recent data from RealtyTrac showed that foreclosures are accelerating after a cooling-off period, and if banks can sell those distressed properties they will move more homes through the process, which suggests a "major overhang of supply," according to Michael Feder, CEO of real estate data firm Radar Logic.


On the positive side, this recovery in the US housing market is coming entirely under its own steam, with little or no assistance from the government. So, unlike the previous bobbles and bounces on both sides of the Atlantic, we aren't looking at this petering out when one incentive or another comes to an end, because the growth is being fuelled simply by the increasing health of the market itself.

Is it really such a stretch to believe that after almost 7 years of all metrics going in the wrong direction, that the market is finding a bottom. Seven years of near constant price declines, 7 years of falling sales and 7 years of falling construction.

Speaking of falling construction, therein lies another reason to be positive about the bottom. Construction has (as the Americans say) been in the toilet for almost 7 years, and with sales having been rising for the past few months supply levels have gotten very low indeed. This will continue to support price growth in the coming weeks and months.

Perhaps most importantly, as was mentioned investors are showing us that the markets is past bottom. In the aforementioned HousingPulse Tracking Survey, agents in both California and Massachusetts said that investors are dropping out because prices are too high.

"Investors are having a hard time finding what they want. Starting to see 'dumb' investors enter the market, the 'smart' ones are exiting the buying," reported an agent from Arizona. "Investors need a deal. There are not as many opportunities as there was this time last year. It seems all the rookie investors are buying now and paying too much," observed an agent in Florida.

Of course the shadow inventory could blow a hole in all this positivity, however, with sales having risen so strongly of late, and such low supply levels, in my opinion it is unlikely that the shadow inventory being turned into distressed sales, is capable of giving any more than a few monthly slips in what should now be a gradual upward trajectory in US housing market data.

- Tuesday 04 September 2012

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