FYI | Oct 09 2007
By Chris Shaw
In the September quarter of 2006 the University of Michigan Consumer Sentiment Survey bounced, giving a signal the worst was over for the US housing sector.
As history shows the signal was a wrong one as the rally peaked early this year and has been trending down ever since, so that by the end of last month the index had fallen back to levels of a year ago.
As Westpac senior economist Justin Smirk notes the real data for existing home sales in the US followed almost an identical pattern, rallying through the end of last year before falling away again through the first three quarters of 2007.
It continued a trend in place since early this decade of the real housing data and sentiment tracking one another closely, which Smirk sees as useful in determining where prices may be headed going forward.
One significant point in the rising trend from 2000 to 2003 in Smirk’s view was the fact despite US house prices rose faster than income affordability levels remained fairly constant. This was due almost entirely to falling interest rates, as the lower repayments meant buying a house was still a realistic option for many investors.
From 2003 to 2006 the reverse was the case as home loan interest rates rose around 134 basis points to 6.82%, while at the same time house prices continued to rise faster than income levels.
The result was a collapse in affordability levels, the index falling by 26% in this period. Again this was reversed a year ago and for a brief time affordability again rose, but as noted above the rally only lasted for around three months.
The current trend according to Smirk is for homeowners to hold their properties and only sell if they have no other option, as any sale would be into a weak and falling market.
This leads him to conclude the current correction in housing prices will be a drawn out affair, as affordability is likely to remain low through the current quarter and the early part of 2008 before recovering slowly later in the second half of next year.
This would suggests housing permits also finding a base around the middle of next year, delaying a recovery in the sector until late next year or early in 2009. Additional cuts to interest rates by the US Federal Reserve would speed up this process but in the absence of such action it will only be further falls in housing prices that will result in a lift in affordability levels.
As a result, Smirk suggests for an earlier recovery to come about in US housing demand there actually needs to be an increase in the short-term pain of falling housing prices. This corrective process will in turn be a drag on US domestic demand, the bank now forecasting an increase in this measure of less than 2% in 2008.
At the same time it expects the recent credit market uncertainty will cause delays to some marginal investment programs, so it has lowered its business investment growth forecast for next year to 3.7% from 4.9% previously.
The one spot of good news is net exports, the bank expecting a pick up to 8.3% growth next year from this year’s forecast of 7.5% thanks to the weaker US dollar and still strong global growth.
This should be enough to offset the lower expectations for investment and domestic demand, so the group is forecasting the US economy will grow at around 2.7% in 2008, which is above market consensus of 2.4% growth.
