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US: Gauging the potential from a turn in housing

Fri, Aug 28 2009, 09:30 GMT
by Peter Possing Andersen, Signe Roed-Frederiksen

Danske Bank A/S

• Along with the US economy moving out of recession, signs of stabilisation in the housing market have emerged. The correction in housing activity over the past three years has taken both construction activity and home sales substantially below any long-term sustainable level. We believe that a turnaround in sales and residential construction is on the cards for H2 this year and home prices are likely to follow.
• Housing fundamentals have turned considerably more positive over recent months. Affordability is close to an all-time high, construction as a percent of GDP is at its lowest level since WWII and the inventory of new homes for sale has dropped below its long-run average. Given our expectation that job growth will be back in the black by year-end, the backdrop is thus in place for a rebound in housing.
• We expect home sales to recover back to the underlying trend over the coming six to eight quarters, and residential construction to turn from a considerable headwind to a modest tailwind. Prices are in the process of bottoming and we look for positive growth in 2010. Unless home sales turn out stronger than we anticipate, we don’t envisage much of an increase in house prices in 2009 though.
  
• Lagged effects from the plunge in household net wealth caused by declining home prices will continue to weigh on consumers through 2010, but at a diminishing rate. This leaves the overall contribution to growth from housing at 0.2-0.3pp AR in each of the coming six quarters compared to an average drag of 1.5pp over the past three.
  

Don't disregard a turn in housing

The burst of the housing bubble and the subsequent plunge in home sales and residential construction has had severe consequences for the US economy. Households have seen the value of their housing assets shrink by more than USD 4000bn since the peak in late 2006. This in turn has fuelled major losses in the financial sector and a ramp-up in the household savings rate. On top of this, residential construction, which at the peak accounted for 6.3% of GDP, has shrunk to a mere 2.4% of GDP in Q2 2009, subtracting on average 1% AR each quarter from GDP growth over the past three years. A turnaround in housing activity and prices will thus remove a significant drag on the economy and a major factor of uncertainty for both the financial sector and US households.

While housing cycles are generally long, the current downturn has been unusually protracted. The boom in the housing market resulted in a relatively large overshooting in investment, home sales and prices, but over the past quarters, this overshooting has reversed into a general undershooting. A turnaround in the housing market is thus on the cards, and once the rebound materialises it has the potential to be hefty.

Indeed, the latest housing market data has been encouraging. New home sales have risen 30% from the bottom in March this year, existing home sales are up 4% and the latest Senior Loan Officer Survey showed an increase in demand for prime mortgages for the second quarter in a row. Furthermore, the two major home price indexes that we track, the S&P/Case-Shiller national and the FHFA purchase only, have shown sequential increases in June.

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Published on  Fri, Aug 28 2009, 09:33 GMT