by Is the U.S. housing recovery still on firm footing? Your view on that will depend on which indicators you choose to believe. For the optimists: New home sales spiked 16.6 percent to 619,000 in April, the highest level recorded since early 2008, while the latest data from the Case-Shiller 20-City Composite Home Price Index shows that prices are 5.4 percent higher in the country’s major cities than they were a year ago. And for the pessimists: April housing starts, though up 6.6 percent from the month before, were down 1.7 percent from the previous year to 1.17 million. The number of starts is only in line with the average of the past 12 months, suggesting that the market lacks momentum. Historically, housing starts have been a leading indicator of the housing market and economic health in general. As the U.S. housing bubble began to deflate in early 2006, housing starts initially experienced a steeper decline than home prices, which suffered a much more dramatic decline a year later. This time around, however, the recent sluggish pace of construction may have created some pent-up demand, particularly for less expensive homes.
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Alice Gomstyn considers the following as important: Construction, Credit Suisse, home sales, housing, Mortgage, new homes, World Affairs: Features
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Is the U.S. housing recovery still on firm footing? Your view on that will depend on which indicators you choose to believe. For the optimists: New home sales spiked 16.6 percent to 619,000 in April, the highest level recorded since early 2008, while the latest data from the Case-Shiller 20-City Composite Home Price Index shows that prices are 5.4 percent higher in the country’s major cities than they were a year ago. And for the pessimists: April housing starts, though up 6.6 percent from the month before, were down 1.7 percent from the previous year to 1.17 million. The number of starts is only in line with the average of the past 12 months, suggesting that the market lacks momentum.
Historically, housing starts have been a leading indicator of the housing market and economic health in general. As the U.S. housing bubble began to deflate in early 2006, housing starts initially experienced a steeper decline than home prices, which suffered a much more dramatic decline a year later.
This time around, however, the recent sluggish pace of construction may have created some pent-up demand, particularly for less expensive homes. “Builders have been unable or less willing to bring on sufficient levels of new affordable supply in many markets given the high land costs and a choppy and uneven demand recovery,” says Michael Dahl, senior homebuilding and building products analyst on Credit Suisse’s Global Markets team. Real estate agents in a number of cities told Credit Suisse in a recent survey that buyer activity would be even higher if more homes were on the market.
But Credit Suisse’s Investment Solutions and Products team believes that worries over lackluster construction activity should take a backseat to two key factors supportive of an ongoing housing recovery: steady income growth and relatively low borrowing costs. Growth in personal income continues to be robust at about 4.4% year-on-year in April, thanks to a tightening labor market. Mortgage interest rates, meanwhile, remain very low from a historical perspective and consumers have been quick to take advantage. Demand for residential real estate mortgage loans strengthened during the first quarter of 2016, according to the U.S. Federal Reserve’s most recent survey of senior loan officers. Credit Suisse’s Buyer Traffic Index, a measure based on a monthly survey of real estate agents, was 53 in April and 52 in May. (A score above 50 indicates buyer activity has exceeded expectations.)
Dahl predicts that if wage growth continues to rise, the supply of affordable homes will rise along with it. For now, however, low inventory levels have been a boon to sellers, driving home prices higher in markets across the country. Every city in the Case-Shiller 20-City index recorded home price increases, with double-digit year-over-year increases in Portland, Seattle and Denver – all cities where real estate agents reported limited inventory in the Credit Suisse survey. In many cases, buyers have decided it would be best to buy sooner rather than later in case housing prices continue to accelerate in the future. As one Seattle agent said, “Price escalation causes urgency.”
Urgent enough to create a bubble? While Dahl says that there always some risk of another housing bubble, especially in high-end coastal markets in California, Miami and New York City, tighter lending conditions and the limited supply in many markets should help prevent the massive housing collapse seen in the last cycle, when easy credit fueled rampant speculation and over-building. Outside of a major shock such as a recession, Credit Suisse foresees a moderation of home price appreciation over the next few years as supply once again catches up with demand.