A firmer floor for US housing

It seems the sector which sparked the GFC is nearing equilibrium, with small falls expected to precede a solid bottom by mid-year.

As in Australia, US consumer confidence is inextricably linked to the value of houses – and the slump in US housing is what has prevented the 2011 American stimulus measures from working as hoped. It looks like at last, in 2012, there is some good news coming.

But if American growth is to stay in the black, the US needs to stop the house price decline, because many Americans have their businesses attached to their property in some way and so are starved of capital.

Even more importantly, many Americans can afford to stay in their homes, but are in negative equity so can’t move. This reduces workforce mobility, which means there are some jobs being filled by substandard candidates, or no one at all, because the ideal worker is stuck in Atlanta with a home loan that’s underwater. Quite possibly they’ll be earning less as well.

It’s amazing to think that with the European debt crisis threatening to send the global financial system into a Lehman-style freeze, the spark that shut down credit markets in the first place – the US property market – is still struggling.

If that doesn’t get Europeans thinking about how long it takes to recover from a debt crisis, nothing will.

While a European catastrophe would have an adverse effect on interest rates for US property – at which point all bets are off – the source of the GFC seems to be getting close to finding a solid floor.

The latest signal came from the November building starts data, which really got the market talking. Statistics from the Commerce Department pointed to a 9.3 per cent jump in building starts to 685,000 annually, the highest level since April 2010.

To put this into context, at the height of the subprime mortgage crisis, annual housing starts were hitting two million. But those levels were fuelled by cheap credit – among other things – and the latest increase, from an admittedly low base, is one of the first things economists are looking for to signal the true bottom of the US housing market.

In December, Goldman Sachs analysts Hui Shan and Sven Jari Stehn published a note revealing their belief that the Case-Shiller US home price index has another 2.5 per cent to fall by the middle of this year, but that will be the bottom.

They come to this conclusion with a new model.

Shan and Stehn took a sample of 147 US metro areas and estimated "equilibrium” for each one, based on population, income, lending costs and construction costs. The researchers concluded that US home prices are getting back to their fundamentally-based equilibrium prices after shooting well ahead of them during the boom years.

It should also be noted that the US property market has already shown some strong signs of recovery this year that onlookers have too frequently failed to notice.

Barclays Capital analyst Stephen Kim has pointed this out to us.

US house prices are seen as a singular market, but the subprime phenomenon creates a world of haves and have-nots. Areas that were prone to subprime lending are continuing to struggle but of course the non-distressed areas have been stabilising for all of 2011, he says.

"This is the most important trend in the housing industry right now, and we are amazed at how little attention it has been getting from the media and the street,” Kim says. "This stability on the part of non-distressed prices has occurred despite a very high share of distressed activity and continued declines in overall prices.”

Not all areas in the US are recovering and so, unfortunately for workers with negative equity in Atlanta hoping for greener pastures, they’re living in a city that isn’t likely to show signs of improvement this year. In fact, the Goldman analysts expect Atlanta house prices to fall another six per cent in 2012, with New York City prices tipped to match that and Portland, Oregon slipping 8 per cent.

But on the other side of the ledger is Miami, which sits in one of the states hardest hit by the subprime crisis that continues to boast some of the highest foreclosure numbers in the US – Florida. Miami house prices are tipped to rise 3 per cent, while it’s a similar story in Detroit, Michigan and Cleveland, Ohio.

Of course, much of this could be turned on its head if Europe falls over. But if the eurozone is to hold together, you can expect to see a similar story as with the US housing market in a few years down the track. Some areas will be leading the way, others will continue to frustrate and nick all the headlines.