 | | Glen Hodgson
Senior Vice-President and Chief Economist
Forecasting and Analysis |
Recent months have seen an improvement in a wide array of U.S. economic data. The labour market finally seems to be on the mend, and the economy has momentum that should be maintained in 2012 as long as the euro zone does not rupture severely. We expect real GDP to expand by 2.7 per cent this year. Unfortunately, the housing market is the Achilles heel that may prevent the U.S. recovery from becoming truly self-sustaining.
The U.S. monthly job creation numbers are looking up as the economy generated 200,000 new jobs in December on the heels of a 100,000 gain in November. The Conference Board’s U.S. consumer confidence index rose sharply in December to end the year on a high. Not surprisingly, retail sales strengthened in the pre-Christmas period and have kept rising with the post-Xmas sales. Also, manufacturing activity accelerated at the end of last year. These are all signs of an economy in recovery, finally.
However, the U.S. housing market is still a mess. In large nations, the housing market is essentially a composite of many local markets scattered across the country. That is certainly the case in the United States, just as it is for Canada. But the aggregate forces driving the U.S. housing market are sobering. While sales of new and existing homes have been increasing recently, they remain near historic lows. As well, although foreclosure rates are down from their record highs they remain well above their norms. The large supply of foreclosed properties in many parts of the country depresses prices and will slow the pace of the recovery. For example, housing starts are still below half the rate in the mid 2000s. It will take several more years before they return to levels that could be considered normal.
The continuous supply of foreclosed homes means that home prices still have not found a bottom despite signs of improving demand. U.S. housing prices fell by 3.4 per cent in the twelve months ending in October 2011, according to the widely-used Case-Shiller index, and average housing prices are barely higher that their lows during the 2008–09 financial crisis. Indeed, average U.S. housing prices are down by over 30 per cent since the property bubble began to deflate in 2006, and close to 15 million Americans are in a negative equity position, with their mortgage worth more than the current resale price of their home. More telling is the behaviour of prices at the local level, with price weakness continuing in most U.S. housing markets. In fact, nineteen of twenty major markets covered by Case-Shiller saw prices fall in October. Four cities—Atlanta, Cleveland, Detroit and Las Vegas—have the dubious distinction of housing prices that are below the level that existed in 2000. In Atlanta, for instance, home prices dropped by 11 per cent in October of 2011 compared with October of 2010.
Cleveland and Detroit have implemented a strategy to destroy abandoned and unoccupied houses and convert the land back to agricultural or other uses. The active demolition of properties is being undertaken in an effort to create a floor under the property market; reduce related city costs such as police and fire protection; and shore up the (limited) remaining value of occupied homes.
In the Phoenix region, there is an active debate about what to do with the land that had been serviced for property development, but where construction of new homes is not anticipated for many years to come. Should it be converted for possible commercial or recreational use? Or just be turned back into desert?
And in Las Vegas, average house prices fell by a further 7.5 per cent in 2011, and are down by more than 60 per cent from their peak in the mid-2000s. Although visitors are returning to Las Vegas thanks to improving economic conditions across the U.S. economy, it still has one of the weakest local labour markets, with a measured unemployment rate approaching 15 per cent. Under these conditions, the Las Vegas housing market has further to fall before it touches bottom.
Continued weakness in the U.S. housing sector is and will be a drag on the labour market recovery. If someone is unable to sell their house or to get a price they deem acceptable, they will be less willing to move to another location to accept or seek a job, even if labour market conditions in the new location are more attractive. So while sustained job creation appears to have recommenced, the U.S. job recovery in unlikely to be robust—which will hold back the overall sustainable rate of economic growth.
With real signs of improvements in demand and a shrinking number of distressed sales we expect that 2012 will be the year that home prices and single family housing starts finally turn the corner. However, the housing sector remains the exposed flank of the U.S. economy. Until the bottom in home prices is reached, it will be hard for the U.S. recovery to achieve stronger and sustained growth.