US housing: ‘in freefall’?
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“America’s housing market has banged its head on the ceiling,” says The Economist. “Now investors and homeowners alike are wondering how soon, and how hard, it will hit the floor.” Sales of new and pre-owned houses are plunging, stocks are rising and prices are falling in real terms.
The data are “awful”, says Paul Ashworth of Capital Economics; “housing is in freefall”. The big question is what this means for the economy – and, by implication, for the stockmarket.
The housing boom helped the economy in three ways, says The Economist: it boosted residential construction, made homeowners feel wealthier and so encouraged them to spend, and allowed them to use their property as “a gigantic cash machine” by borrowing against their capital gains.
Merrill Lynch estimates that these factors contributed more than half of US total GDP growth last year, while the housing boom accounts for one in three jobs created since 2001. So a falling housing market could lead to a broader slowdown.
This is likely to be bad news for the stockmarket, says Jeremy Warner in
The Independent: a mini-crash similar to May’s can be expected next month when more weak US house-sales data will “create another wobble”. However, in the current “extraordinarily benign economic environment”, a
pre-Christmas rally is also likely.
But such a rally might be a false dawn, according to Merrill Lynch’s David Rosenberg. He has spotted an interesting correlation between the S&P 500 and the NAHB index, which is a survey of US housebuilders’ sentiments about the housing market. Since 1996 the NAHB index has led the S&P 500 by around 12 months. If this relationship holds, then equities will plummet around this time next year.
The link doesn’t hold before 1996, when shares shrugged off two NAHB slumps; this might be because those housing downturns were exacerbated by banking crises rather than the economy, says Bill King in The King Report. Alternatively, the reason may be that asset markets have become more correlated in recent years, as many analysts claim.
Or the pattern may just be a coincidence. Either way, we shall soon know.
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