U.S. Housing Troubles
Author: www.ReiBlog.org
Category: Investors Insights
- U.S. housing is important for two reasons.
- First, it is the cause of U.S. economic woes and the credit crunch due to excessive sub-prime lending in recent years.
- Second, it is the most leading of leading indicators for the U.S. economy, and thus serves as an important bellwether for both the bond market and the economy.
- The U.S. housing market is in a dismal state, and should remain a drag for several more months.
- It is important to note that residential construction is now less than 4% of GDP (Source: BEA), and so this by itself does not spell doom for GDP.
- Its impact also spreads to sentiment and the multiplier effect of housing on the overall business cycle.
- The weakness in housing is driven by higher mortgage rates, poor affordability, high debt-service ratios and tightening lending standards.
- Even more fundamentally, some Americans were able to purchase homes without the obvious means to afford the homes if house prices ever ceased to rise at a robust pace, and are now facing foreclosure.
- The largest set of sub-prime mortgages were issued over the past few years, constituting roughly 20-25% of all mortgages (Source: Mortgage Statistical Annual and Inside Mortgage Finance). Many mortgages offered an initial teaser rate followed by a sharp increase in rates. These higher rates will hit quite hard over the next year.
- For the U.S. housing market (and thus economy) to improve, one first needs to see substantial improvements in affordability which will in turn boost home sales (it is estimated a further 10-15% drop in home prices). As a result, inventories will begin to fall. Finally, construction activity will pick up again. This means an improvement no sooner than late 2009.
- In the meantime, although the direct economic impact of the housing slowdown is clear – further bank losses, less construction activity, diminished furniture sales – there is also an equally important potential indirect impact. This is via a reduced wealth effect and mortgage
equity withdrawal that affects consumers.
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