A ray of hope for US housing

As Europe teeters on the brink of collapse and US jobless claims continue at peak levels, there is one clear ray of global good news – the US housing market has bottomed and in many key markets is edging higher.

Around one third of American home owners are in a negative equity situation – their loans are more than their house is worth. While so many Americans are under water, there can be no meaningful American revival.

Had Obama made US housing his first priority instead of health the US economy would now be much stronger. Nevertheless the latest trends mapped by the respected Case-Shiller house price report have enabled the US business news website Business Insider to declare:

"It's time for people to accept it, the housing bust is over”.

Of course, battered American home owners might say: 'We've heard this before'. Indeed the last four years have featured distinct phases where the housing market, so ravaged by the subprime mortgage crisis, was starting to bottom. Each time it was a false dawn and the brief recovery was followed by further deterioration.

But this time there's an unmistakably positive sentiment emerging between analysts, government – both state and federal – and the media that the US housing bust has officially come to an end.

The Case-Shiller index indicated that house prices rose in April from March in 19 of the 20 cities it tracks. Importantly, this is the second consecutive month that a majority of US cities have seen price gains and, symbolically, none of them have touched fresh lows.

The latest National Association of Realtors survey for May, another closely watched set of numbers, show that home sales are 9.6 per cent higher than the same time a year ago, at 4.5 million annually. The Commerce Department indicates that new home purchases rose at the fastest pace since April 2010 in May, up 7.6 per cent to 369,000.

To put the numbers above into perspective, prices are around the same levels seen in 2003. Total home sales before the global financial crisis would routinely top 6 million (one third above current levels) and new home purchases would need to sky rocket to 700,000 per month before the market could be considered to have returned to its old level.

So there's a lot of upside, yes? Then let the recovery begin.

But the definition of ‘recovery' is hard to pin down. The US media has carefully ignored some basic questions about what should be expected from the US housing market once a bottom is found.

A routine question asked by some of the most prominent faces on all the networks is "When will the American housing market return to the levels we saw in 2006/07”.

It's a bad, almost meaningless question because 2006-07 was inflated by the sub-prime scandal. A better question is when will the US housing market return to long-term trend growth levels?

To make even an attempt at answering this question, it's worth looking at the underbelly of the American housing market, which reveals the wounds of the subprime mortgage crisis have not entirely healed.

Many house prices in smaller cities and major towns will continue to decline while the capital cities regain their strength. Millions of homes are still in negative equity and America's foreclosure divide will continue to weigh down states that didn't rip the bandaid off when they should have.

The latest foreclosure stats are encouraging. According to RealtyTrac, US banks repossessed fewer homes in April, the third straight month of declines.

But the states that built up a backlog of underwater houses by requiring the courts to play a foreclosure delaying role are staring at a longer wait before a solid bottom can be found.

States like Florida, New Jersey and Pennsylvania continue to grapple with large numbers of homes destined for foreclosure. RealtyTrac said that the ‘judicial foreclosure' states saw a 15 per cent increase in activity since April last year. So the good news has come from the states that kicked people out of their homes quicker.

But the US housing trend is unmistakably beginning to point upwards. What could stop it this time around?

The US Federal Reserve has made sure the market knows that interest rates will remain "exceptionally low” until at least the midway point of 2013. Which means loans will be cheap for at least another 12 months, and probably longer.

The more interesting threat to the US recovery in general, including the housing market, is the promised budget cuts that have been delayed until next year.

As Business Spectator's Alan Kohler wrote two months ago (US sleepwalks towards a fiscal cliff, April 17), the problem with kicking the can down the road is you'll eventually come across it again.

"There are actually a whole lot of cans that all come together on January 1, 2013: the end of the Bush tax cuts, the expiration of the 2010-11 payroll tax cut, expiration of emergency unemployment benefits and most importantly, $1.2 trillion of spending cuts that Congress stipulated would kick in automatically because the committee charged with finding agreed spending cuts couldn't agree. "All up, the US economy is facing its biggest fiscal contraction ever – one large enough to cause a recession in 2013. What's more, the markets don't seem to be taking any notice of it, perhaps because they don't believe Congress will actually let it happen.”

America has exhausted its fiscal policy instruments and there's nothing left in the federal coffers.

If there's anything to take away from the latest US housing data, it's that the market is beginning to resemble something capable of entering the coming fiscal contraction without sliding back into the savage declines. And for America that is good news.