2nd March 2012
Reich says that the biggest continuing problem for most Americans is their homes: "Purchases of new homes are down 77 per cent from their 2005 peak. They dropped another 0.9 per cent in January. Home sales overall are still dropping and prices are still falling – despite already being down by a third from their 2006 peak. January's average sale price was $154,700, down from $162,210 in December.
"Houses are the major assets of the middle class. Most Americans are therefore far poorer than they were six years ago. Almost one out of three homeowners with a mortgage is now "underwater", owing more to the banks than their homes are worth on the market."
He concludes that apparent recent improvements in housing data – such as a decrease in the number of homes on sale – are illusory and only government intervention – in the form of changes to the bankruptcy rules and, possibly, taking on some mortgage debt – will stop the rot.
Goldman Sachs has also recently pushed out its forecast for the bottom of the housing market to mid-2013: "First, we now see a somewhat weaker near-term house price outlook. Specifically, we forecast that house prices will decline by 3.3% from 2011Q3 until 2012Q3, and by an additional 1.1% between 2012Q3 and 2013Q3. Second, the expected bottom in house prices is pushed out from end-2012 to mid-2013."
In response to both articles, a number of people have pointed out additional headwinds for the US housing market: williambanzai7 says on Zerohedge: "There will be no housing recovery until those 46% of unemployed young Americans figure out a way to find a job. And if they do find a job, it had better be a very secure one. Otherwise tying oneself down with a mortgage and sacrificing mobility would be very ill advised indeed."
Munzoenix on the FT site says the headwinds for US housing are demographic: "The generation that is just finishing school, the kids of baby boomers, are loaded with student loan debts….The income potential of those who are just finishing school has been severely hammered by this recession…. Which brings me to something else that is important – work place insecurity and the globalized economy. Why commit to a big mortgage in a specific location of the country when you may lose your job or get relocated?"
However, before getting too gloomy on US housing, there are those who believe that there are signs of life. For example, Simon Ward, chief economist at Henderson, says: "It is recovering slowly in my view. However, a rebound in Treasury yields and mortgage rates could abort the recovery. The direct implications for GDP are small, since housing investment is now only about 2% of GDP versus more than 6% at the peak." In other words, the decline has been naturally stabilising in reducing the importance of housing overall.
Warren Buffet has admitted that he was too optimistic in predicting a housing recovery by now, but believes it will still happen: "Buffett said housing "remains in a depression of its own," but he predicted…that the housing market will come back because some human factors can't be denied forever.
"People may postpone hitching up during uncertain times, but eventually hormones take over," he wrote. "And while 'doubling-up' may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure."
Other leading economists have also predicting an imminent recovery: Jay Brinkmann, chief economist at the Mortgage Bankers Association, says: "One measure of the health of the market is what is going on with delinquencies. We will not see prices come back until we see foreclosures end…and in this there are signs that the market is on the mend. We are in the third stage in the type of recovery – the first stage was dealing with sub-prime, the second was the recession and now we are seeing the numbers distorted by some really bad states. There are some good signs in these delinquencies."
The US housing market is undoubtedly still weak and has stayed weaker for longer than many originally thought. However, there are better signs and while there are many things that could derail its fragile improvement, the problems are slowly working through the system. It is a hindrance to economic recovery, but it is also reflective of it.
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