USA: US housing bottoming out
Tue, Oct 17 2006, 10:59 GMT
by Peter Possing Andersen, Carsten Valgreen
- Since late 2005, home sales have been plunging, homebuilding activity has slowed significantly and homebuilder sentiment has dropped to its lowest level since the early 90s.
- But, how much worse will it get? We expect that new home sales have reached a trough, as mortgage applications have been relatively stable in recent months and the S&P500 homebuilder index has re-bounded. Further, the pace of deterioration in the inventory-sales ratio for new home sales is slowing and new home sales now seem well aligned relative to fundamentals such as interest rates, income and unemployment.
- This implies that the negative impact of construction on economic growth will peak in Q3/Q4 and then gradually ease in H1 2007. Nevertheless, it will take a few quarters before residential construction spending has adjusted fully to the slower pace of sales.
- We also suspect that the NAHB housing market sentiment index is close to a turnaround. When signs of stabilisation in the housing market becomes visible in the data, the ramifications for the financial markets and fed thinking could be significant.
- While the exact timing of a stabilisation in the housing market is very difficult to determine, we think that the case for a stabilisation has strengthened of late, meaning such a scenario could very well play out during the coming months.
