US property is still sickly
America is becoming a nation of renters amid declining house sales and rising unemployment.
Five years on from the start of the US housing crash, the market is still frail, says the Financial Times. Analysts believe it will take until 2014 for prices to return to even last year's levels. Construction "remains depressed", sales of new houses are "at record lows while those of existing houses are a third below their 2005 peak" and "delinquencies remain near record highs". What's more, the number of foreclosures (repossessions), or houses awaiting foreclosure that are about to go onto the market, "continues to grow". Potential buyers are being put off by the fear that the "largest investment of their lifetimes will soon be devalued" by foreclosed houses pushing down prices.
Government-backed mortgage finance company Freddy Mac last week said it needs to borrow a further $6bn of federal funds after it lost $4.4bn during the third quarter, its worse such loss for over a year. Freddy Mac's chief executive Charles Haldeman blamed the weak labour market, which is encouraging people to rent rather than buy. So far, low interest rates and government interventions, such as a scheme for distressed homeowners aimed at cutting monthly mortgage payments, have failed to reverse the trend.
The housing problems "are clearly a big reason why our economy is not recovering more quickly", says Federal Reserve chairman Ben Bernanke. The US housing sector normally contributes half a percentage point to real growth in GDP, but it is now a drag, subtracting 0.15 of a percentage point from GDP during the past year, reckon economists at Goldman Sachs. Worryingly, the Fed is viewed as "powerless to reverse the cycle", says the FT, with many US banks unwilling to finance new home loans unless buyers can satisfy far stricter criteria.
The situation is unlikely to improve soon. As Jed Kolko notes on The Huffington Post, construction sector employment fell in October, while the unemployment level for 25 to 34-year-olds (the prime home-buying demographic) hit its highest level since December 2010. Pundits now expect the US to turn into a "nation of renters", says Shahien Nasiripour in the FT. Karen Weaver of Seer Capital Management says the home ownership rate could fall to 61% in the next three to five years. The rate has never dropped below 62% since before 1960. Expect property to remain a millstone around the US economy's neck for some time to come.