Big upturn in US house sales, is it a sign the credit crunch is easing
The National Association of Realtors has recently reported that the number of pending house sales has risen for the fifth consecutive month. This is the longest trend in the number of sales since July 2003.
The Pending Home Dales Index is based on the number of contracts signed for sales each month and June 2009 saw the index rise by 3.6% to 94.6. The index is now a healthy 6.7% higher than the lowest, which was recorded in June 2008, of 91.3. Official statistics released by the US Department of Housing and Urban Development show that the annual seasonally adjusted sales rate is 384,000 homes, which is up 11% above May but below the June 2008 number of 488,000. Current supply is estimated as being 8.8 months of stock at the current sales rate.
Analysts have rationalised the gains as being due to a number of factors. A combination of low mortgage rates, large stocks of available housing combined with falling prices are encouraging buyers to get back into the market as the early signs that markets are stabilising can be seen. The market is particularly strong for the lower priced homes. First time buyers also have the added incentive of an $8,000 tax credit if they are able to close before the end of November. The closing process takes roughly two months so home buying activity is likely to increase for the coming weeks.
The upturn comes after a prolonged period of meltdown in both the property and banking sectors. The origins of the credit crisis were in packaged home loans to sub prime credit customers on over priced homes that lost value quickly when foreclosures started to increase. If this were on a small and localised scale then it would probably have been manageable but the loans were packaged and syndicated around the world on a massive scale. Once it was clear that the default rates were climbing due to a drop in demand leading to the recession, the whole mountain of debt collapsed like a house of cards. Confidence drained out of the financial markets as banks tried to estimate their losses and whether they could survive. It quickly became evident that the amount of so called 'toxic debt' was too great for many financial institutions and they came close to failing.
Credit supply for building and buying new homes dried up, the recession started to create uncertainty over jobs and people withdrew from making large scale financial commitments.
We are now nearly two years on and the financial markets have been stabilised. Although not out of the woods completely, enormous amounts of state aid have propped up the banks and started to instil a sense of optimism that the worst is over. With that, governments are encouraging them to increase lending where they can to help stimulate demand and support businesses that are struggling to restock after the downturn.
The Housing Affordability Index, also published by the National Association of Realtors in the US, shows that housing is now more affordable. The indications are that the average mortgage and interest payment would represent just 15.7% of a family's gross income – down from the long terms average of 25%.
Wider measures in the economy still indicate a fragile situation. Inflation is negative (1.2%), GDP is negative (-1%) and unemployment is still climbing (9.4%). But most of the major retailers are starting to show increased sales numbers. The official measure of retail sales is expected to show an increase of around 0.7% when released in late August 2009. But economists say that people are seeing the worst as being over. Unemployment, though high, seems to have peaked and that there is more confidence about job security. Even where there is no sales growth, the rate of decline is easing, again leading to a stronger and more positive sentiment.
The US economy is enormous and can generate huge demand and ripples around the world. As first into the recession there is an expectation that the powerhouse, consumer led economy will help to stimulate demand around the globe and lead to a steady recovery. The old adage may still be true that when America sneezes, the rest of the world catches a cold. This may not be the case in the future as new economies such as China and India take a greater share of world trade, but we have certainly seen a US led rerun of the 1930's recession played out in full.
With sentiment turning positive and spending starting to rise, there are good signs that the recession is starting to end.