Since 2007, every spring has seen a rush of hopeful forecasts claiming that – finally – the US housing market has hit bottom. Sadly, for those trapped in foreclosure, and for those in the chemical industry who depend on housing sales, there is little real evidence today for such optimism.
Housing also provides a good example of the way in which markets are becoming increasingly complex, as we discuss in chapter 11 of Boom, Gloom and the New Normal, to be published next week.
In the past, prices would usually ‘bottom-out’ when inventories of unsold homes were ~6 times the volume of those being sold each month. In March, the average ratio was 6.3 times. But this hides the real picture.
The scandal of ‘robo-foreclosure’, where unauthorised people signed documents to evict people from their homes, means that most foreclosures suffer long delays whilst legal ownership is properly established. This means, for example:
• The average foreclosure process is taking nearly a year (348 days)
• In Florida, one of the worst-hit states, it takes 806 days
• In New York, it takes 1019 days
At the end of 2011, nearly 1.9m homes had some form of foreclosure filing on them. If all these foreclosures were on the market today, they would nearly double current inventory to ~11 months – in line with the level seen in the dark days of 2008.
Another feature of the robo-signing delays is that they have temporarily boosted US retail sales. Those facing foreclosure obviously stop making payments on their mortgage. Barrons, the US investment magazine, calculates this is currently adding 1.2% to US retail sales ($42bn). But as they add “soon enough, the ‘savers’ will have to spend on rent”.
The chart shows how the S&P Case-Shiller index of US home prices initially fell 34% from their peak to April 2009. They then plateaued, as apparent inventory began to reduce. But now they have started to fall again. Prof Robert Shiller of Yale University, the co-founder of the index, is not optimistic:
“I’m more concerned about the downside than most people. I could see it staying languishing and edging down for years.”
He notes that home values took eight years to reach a bottom during the Great Depression and 11 more years to regain their lost ground. Nominal US home prices fell about 30% from 1925-33 and didn’t return to their pre-crash peak until 1944, the year before World War II ended.
Housing is at the centre of the US economy, and was the principal cause of the current financial crisis. Yesterday’s disappointing 2.2% GDP growth is yet another reminder that true recovery will remain a distant dream until the housing crisis is resolved.