US housing rally has legs

“Even the biggest investment bubbles eventually correct themselves,” says John Authers in the FT. It now looks as though the American residential housing market is turning the corner after falling by more than a third from its peak. The widely watched Case-Shiller index of national house prices jumped by almost 7% between April and June compared to the first quarter.

“It has had false dawns before, but other data support it this time.” The CoreLogic index of national prices was up 4.6% year-on-year in August. The National Association of Realtors says the median house price was 9.4% up on last year in July.

This rally “has legs”, says David Blitzer of S&P Dow Jones Indices. Bank credit is becoming increasingly available, while mortgage rates are at record lows. The slow but steady improvement in job growth also bodes well. On the supply side, there has been a sharp drop in house construction, while the inventory of unsold houses has gradually fallen to 6.4 months’ worth at the current sales pace – down from ten months when prices were collapsing.

Supply won’t fall fast, however, as 6% of US home loans are at least 90 days delinquent or in some stage of foreclosure. In a normal market, that figure would be around 2%, says Jonathan R Laing in Barron’s. All this suggests there’s scope for prices to climb slowly from here. Mark Zandi of Moody’s Analytics is pencilling in a 10% increase by the end of 2014.