Jan 21st 2010 | WASHINGTON, DC | From The Economist print edition
WHEN American house prices finally started rising in June last year, ending a three-year decline, homeowners and economists rejoiced. The steep plunge in values, about 33% nationally from peak to trough, caused widespread damage in the American economy and abroad. The stabilisation of prices turned out to be a precursor to broader economic recovery.
Since bottoming out between May and June, prices have ticked upwards every month, while sales have risen from their recession lows. And yet gloom persists. The pace of foreclosures has not abated, and there has been no improvement in employment in residential construction.
Worse still, the momentum now seems to be ebbing. Mortgage applications for purchases fell sharply in November, to their lowest level since 1997. Confidence among home-builders declined in November for a second consecutive month. And figures released on January 20th showed that new housing construction, which recovered from the record lows of early 2009 to plateau late last year, fell by 4% between November and December. The fear is that prices will soon start to fall again, touching off another round of pain for homeowners, workers and banks.
The stalling housing market can be blamed, in part, on the end of the government supports that have buoyed recovery. Purchases of mortgage-backed securities by the Federal Reserve and the government’s bailed-out mortgage giants, Fannie Mae and Freddie Mac, helped keep mortgage credit flowing and interest rates low. But Fed purchases, the bulk of the support, are due to end in March.
Other interventions are less admirable. A large tax credit originally offered to first-time buyers was extended in November to cover all buyers with incomes under a certain threshold, and to last until the end of April. Although this has boosted sales, it has largely done so by moving them forward (at no small expense to taxpayers). With the end of the programme the bill will come due, in terms of reduced sales.
All told, government support boosted house prices by about 5% last year, according to a recent Goldman Sachs analysis. As their end approaches concern has grown, not least because the underlying fundamentals remain shaky. With many mortgage loans underwater, continuing job losses are pushing ever more households into default. Nearly 3m properties entered foreclosure last year, and filings increased by 14% from November to December. Foreclosures place downward pressure on house prices, contributing to a vicious cycle of economic pain.
In all likelihood, prices will not begin a new and steep decline. Economic output is now growing again, and most economists believe the economy will begin adding jobs by the spring. Equally important, house prices are no longer out of line with fundamentals. Relative to rents, for instance, house prices are now 3% below their long run average using the S&P/Case-Shiller national index. At the peak of the bubble, they were 40% overvalued. But the end of government support will put housing markets under great strain. It is a difficulty the American economy had better get used to.
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