House prices hail America's rebuild

The US house prices index's double-digit growth in the year to March is a strong indicator the US economy is climbing out of the mud and into a sustainable rebound.

The uneven economic growth performance in the US was tilted to the positive side overnight with confirmation that house prices continue to climb out of the mud that was the catalyst of the banking and economic crisis of 2008 to 2010. A jump in consumer sentiment also bodes well for household spending growth over the next few months. 

The US Case-Schiller index of house prices rose 10.2 per cent in the year to March, the fastest rate of increase in seven years. In isolation, this looks to be a strong rebound, but the context of these gains is that prices fell by around 35 per cent from the 2006 price peak. In other words, despite the gains over the past year, house prices are still around 28 per cent down from the peak. 

The recent rebound is, in the context of the US banking and economic performance, good news. It is an essential element helping consumers to rebuild their otherwise shattered balance sheets. As prices rise, there are fewer borrowers with negative equity in their houses and this helps to restore confidence and their ability to spend and importantly, borrow.

From the banking sector’s perspective, rising house prices now, after the carnage of the 2008 to 2011 period, are also a positive development given the massive overhang of bad debts, low quality borrowers and their inability to boost credit given the absence of credit worthy borrowers. These negatives for the economy are slowly but surely fading. When consumers have negative equity on their mortgages, for example, it exposes the banks to unavoidable losses and bad debts and undermines their ability to provide credit and hence there is a spiral into economic funk. 

This is why double-digit house price growth is good news.

The Federal Reserve and its Chairman, Ben Bernanke, will no doubt welcome the news for all of the reasons mentioned – it is another step along the road to a sustainable aggregate economic recovery.

Other US housing indicators have been similarly positive in recent months. Home builder confidence is at a six year high and while there was a dip in new housing starts in March, they are in a clear up trend to be over 13 per cent higher than a year earlier. There have also been three building companies list on the US stock exchanges so far in 2013, which are the first such listings since 2007.

Clearly something positive is brewing in the US housing market. Easy monetary policy is working to reflate the otherwise depressed housing market and with it, set the economy on a more sustainable growth path.

At the same time, the Conference Board measure of consumer sentiment continues to rise, with a move to 76.2 points in May from 69 in April to be at its highest level since February 2008.

This good news on housing and consumer sentiment saw a strong market reaction – stocks were up while perhaps more importantly, the 10 year government bond yield jumped to 2.16 per cent, a 13 month high.

The jump in bond yields happened despite the ongoing threat and actual action of quantitative easing from the Federal Reserve and marks quite a massive sell-off from the start of May, when 10 year yields were 1.62 per cent and from July 2012 when they hit an all-time low of 1.40 per cent. The rise in yields reflects a mix of higher inflation pressures and an element of risk with the markets now willing to fight the Fed and start to position for yet stronger economic growth.

While it is very early days and with QE still designed to drive yields lower, the backup in bond yields is a tentative sign of some normalisation in markets and is again encouraging to observe.

The US is growing at a solid, if not terrific pace. Further growth is needed before there can be any confidence that bad news will not raise its ugly head again and that there is a sustainable, stimulus free, growth momentum in place.

This could be a year or two or even three away, although sustained double-digit house price rises and further strength in consumer sentiment confirm that the economy will, one day, get back to an even keel.

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