US housing market ready to rebound

It can withstand removal of govt and Fed stimulus plans: economists

The US housing market is poised to withstand the removal of government and Federal Reserve stimulus programmes and rebound later in the year, contributing to annual economic growth for the first time since 2006, economists say.

Increases in jobs, credit and affordable homes will help offset the end of the Fed’s purchases of mortgage-backed securities this month and the expiration of a federal homebuyer tax credit in April.

Sales will rise about 6 per cent this year, and housing will account for 0.25 percentage point of the 3.6 per cent growth, according to forecasts by Dean Maki, chief US economist for Barclays Capital in New York.

‘I would bet even odds that we’re at a bottom and that we’re going to see improvement in the coming months,’ said Karl Case, co-creator of the S&P/Case-Shiller Home Price Index and a professor of economics at Wellesley College in Wellesley, Massachusetts.

An improving market would allay concerns at the Fed that sales will relapse after the tax credit expires. It would also give it a freer rein to ultimately raise the interest rate for overnight loans among banks from near zero.

Homebuilders’ shares reflect the optimism. The 12-member Standard & Poor’s Supercomposite Homebuilding Index hit a five-month high on March 9 on speculation that the expanding economy will boost sales.

But recent housing data have been mixed. Sales of existing homes fell 7.2 per cent in January, while housing starts rose 2.8 per cent, according to statistics from the National Association of Realtors in Chicago and the Commerce Department in Washington.

Employment is key to the outlook, according to Patrick Newport, an economist with IHS Global Insight in Lexington, Massachusetts. ‘When people get jobs, that’s when they move or decide to buy a bigger house,’ he said.

As many as 300,000 new jobs may be added this month, the most in four years, thanks to an improvement in the weather, government hiring of temporary workers for the census and a growing economy, said David Greenlaw, chief fixed-income economist at Morgan Stanley in New York.

Credit conditions may also be improving. A net 13.2 per cent of banks surveyed by the Fed in January reported that they tightened standards on prime mortgage loans in the fourth quarter, the smallest percentage since the central bank began tallying such data three years ago.

‘This is an important step in the right direction,’ Peter Hooper, chief economist at Deutsche Bank Securities in New York, and his colleagues wrote in a report to clients last month.

The housing market’s first hurdle comes at the end of this month, when the Fed completes its programme to purchase US$1.25 trillion of mortgage-backed securities and about US$175 billion of housing-agency debt.

The move probably won’t have much impact, said Mahesh Swaminathan, a mortgage strategist at Credit Suisse Holdings in New York. Private demand will replace the central bank, keeping down the spread at which mortgage-backed securities trade to 10-year Treasury notes, he said.

He sees mortgage rates remaining ‘about where they are now’.

Once the Fed completes its purchases, the next obstacle for the market is the expiration of the tax credit for first-time home buyers.

The original credit helped boost existing-home sales by 4.9 per cent to 5.16 million last year, the first increase since 2005, according to the Realtors’ association. The credit, which was slated to end on Nov 30, was expanded and extended through April.

The final challenge for the housing market this year is the supply of available properties and the prospect that it may rise.

Foreclosures may increase to 2.2 million this year from a record 1.7 million last year, according to a forecast by Mark Zandi, chief economist for Moody’s Economy.com in West Chester, Pennsylvania.

Source: Business Times, 17 Mar 2010