The party’s over for the US property market
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Talk about a house party. Over the past five years, US house prices have risen by more than 50%, and the price of about a third of the country’s housing stock is up by 70%. But the fun may be coming to an end.
Capital Economics calculates that US housing is about 25% overvalued if you look at an average of measures – including prices relative to incomes and average weekly earnings. As Ellen Simon notes in the San Diego Union, “the clean-up won’t be pretty”.
The median US house sale price fell by 5.7% in September, though it was still up by 13.4% for the year, while the pace of growth in sales of new homes was 0.1% down on an annual basis. The recent increase in the number of unsold homes available also points to a cooling market; according to Wachovia, the ratio of inventories to sales is now at a nine-year high. Thirty-year fixed-rate mortgage rates have climbed to a 16-month high, and variable rates are also rising, dampening demand for mortgages. Applications were at a six-month low towards the end of October. Recent insider selling (directors selling shares in their own firms) at homebuilders is another negative sign. Toll, America’s leading luxury house builder, rattled the markets last week by warning of slower sales next year and its directors sold over three million shares. According to bond guru Bill Gross, real house prices typically peak after the Fed has raised short-term rates by 3% – which it now has.
“Never before have so many homebuyers been so vulnerable” to lower prices, says Eric Fry on Dailyreckoning.co.uk. Mortgage debt is so high that almost 20% of US homeowners would see their equity wiped out entirely by a 5% price drop. A price decline could gather momentum fast as forced sellers ditch their homes.
The wider worry is that the housing boom has largely underpinned the economy for the past few years, as consumers refinanced, or borrowed against, their appreciating homes, thus funding a spending spree. Last year they tapped their houses for $600bn, or 5% of GDP. Capital Economics calculates that the housing boom was responsible for 25% of the increase in consumer spending over the past year, while 30% of jobs created since 2001 are directly linked to it. The upshot is that even if house prices simply level out, consumption growth would fall by an annual 1%, reducing GDP growth to below its long-term trend. And according to Gross, if real house prices decline in 2006 or 2007, “a recession is nearly inevitable”.
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