Will the US housing market achieve a soft landing?

published 8 October 2007

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It's official - US house prices are now falling.

The price of existing homes - which account for about 85% of the housing market - in the US fell year-on-year for the first time in 11 years last month. The median price of a previously-owned house fell 1.7% on last August, down to $225,000 (about £118,000), said the National Association of Realtors.

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There was some good news however - sales fell just 0.5% in the month, much less than analysts had expected. So what are the chances that the US will see a UK-style housing bounce?

The National Association of Realtors, unsurprisingly, tried to accentuate the positive side of falling house prices despite the fact that it's only the sixth time in 38 years that US house prices have fallen on an annual basis (not adjusting for inflation).

David Lereah, group chief economist, said: "Sellers are finally getting it. The price drop has stopped the bleeding. Sales have hit bottom."

Part of the reason for the sharp decline in US house sales is the 17 consecutive interest rate hikes since 2004, which have driven up borrowing costs. But now that the Fed has stopped hiking rates and markets have become more concerned about a slowdown than inflation, the yield on long-term US government debt, or Treasuries (which, in contrast to our system in the UK, is the main driver of mortgage interest rates) has started to decline.

The average rate on a 30-year fixed mortgage slipped back this week, to 6.4% from 6.43% last week, according to US mortgage group Freddie Mac. That's still a sharp rise on the 5.8% seen at this time last year, but it might be enough. After all, it only took one tiny rate cut in August 2005 to arrest the downward trend in UK house prices.

The trouble is, America's got more worries than just borrowing costs. The slowdown in house sales is already having a big impact on the construction industry. According to Bloomberg, the slowdown in housing construction in the second quarter "subtracted more from economic growth than at any time" since the start of 1991. That's not good news for jobs, which will put further pressure on the housing market.

And sentiment in the US has already turned. Americans are already beginning to realise that actually, you can go wrong with bricks and mortar. Property pundits in the UK continually cite the supply and demand situation as one of the key props holding up the British housing market. Now this is extremely debatable, but it's certainly true that population density is much higher in the UK than in most other developed economies. Rough and ready estimates from the UN put UK population density at 246 people per square kilometer. The corresponding figure in the US is just 31 people.

Add to that the fact that Americans are generally far more tolerant of driving what we would see as ludicrous distances to get to work in the morning, and it's clear that you could never describe the country as having a structural shortage of housing.

So it's no wonder that inventories are still rising. The number of unsold homes has hit a 13-year high it would now take seven and a half months to offload all those houses at the current sales rate. Realtors (US estate agents) reckon a six month supply represents a balanced market.

It's firmly a buyer's market. And regardless of what happens to interest rates, once people realize that the house they are looking at today will be cheaper tomorrow if they just sit on their hands, they simply won't buy.

So we're inclined to agree with Ian Sheperdson of High Frequency Economics, who was quoted by Bloomberg as saying: "There is worse news in the pipeline. With inventory still rising, there is no chance of any short-term relief. Prices and volumes have a long way to fall yet."

Turning to the stock markets...

The FTSE 100 fell off from an earlier high of 5,837 to end the day down 24 points, at 5,798. The falls were led by the mining blue chips, prompted by a commodity price slump on fears of reduced global demand. Vedanta Resources made the biggest losses of the day, with Antofagasta, Anglo American, BHP Billiton and Xstrata also significantly lower. Smith & Nephew was the biggest gainer, as hopes of sector consolidation pushed drug stocks higher. For a full market report, see: London market close

Across the Channel, stocks tracked early gains on Wall Street. The German DAX-30 closed 18 points higher, at 5,901. The Paris CAC-40 was at 5,146 at close, having gained 4 points. Oil stocks made the biggest losses of the day on the softer price of crude, led by Total.

On Wall Street, the falling price of oil caused stocks to rally, despite more depressing news from the housing market (see above). The S&P 500 gained 11 points to close at 1,326, a five-and-a-half year high. The Dow Jones was up 67 points to 11,575, and the tech-heavy Nasdaq closed 30 points higher, at 2,249.

In Asia, the Nikkei closed 76 points lower today, at 15,557.

Crude oil dipped to its lowest level since March yesterday, falling as low as $59.52 a barrel, but recovered somewhat on speculation that OPEC may cut output to avoid a further slump. Crude was trading at $61.33 this morning, with Brent spot at $59.82 in London.

The slightly higher oil price also pushed the price of gold up. Spot gold was trading at $592.80 in the early hours.

And in London this morning, owner of All Bar One and Harvester pubs Mitchell and Butler revealed that sales of food in its Scottish pubs had risen 11% since the introduction of the smoking ban there in March, but that drink sales had fallen 1%. However, the group reported that trading in England and Wales remained strong, with like-for-like sales up 3.8% in the 18 weeks up to September 16, and expressed confidence in the future.

And our two recommended articles for today...

Why now is the time for stock markets to fall

- Two weeks ago, we featured a piece from the Onassis newsletter about the Four Horsemen of Stockmarket Apocalypse the key indicators of adverse market conditions and now the authors are suggesting that their time may have come. What's more, the last week has historically been a time of year when markets reach major turning points. To find out why all the signs are pointing downwards, read: Why now is the time for stock markets to fall

Could theUS housing market crash?

- The US property market will not suffer a hard landing, says Mike Shedlock of Whiskey and Gunpowder. With unemployment rising and more and more Americans missing mortgage payments, he believes the outcome could be a lot worse: the US could be heading for an all-out crash. For another opinion on the US housing market, see: Could the US housing market crash?

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.