Housing has had a ‘slow, slogging recovery,’ says Wells Fargo economist Tim Quinlan, but is on less shaky footing than before.RICK WILKING/Reuters
Housing was a major engine of U.S. economic growth before the bubble burst, triggering the worst recession in decades and wiping out trillions of dollars of home value. The battered sector has been struggling to regain solid footing ever since, typically losing ground again after some hard climbing.
But recent data signal that this time the residential market may be headed toward a more sustained recovery. American home builders are certainly more confident than they have been in years. The industry's main sentiment index is at its highest level in nearly a decade.
Still, after previous false dawns, economy watchers understandably remain cautious. They cite such potential rain clouds as tight bank credit, tougher mortgage standards, a lack of inventory, declining affordability, a reduced percentage of first-time buyers and the dampening effects of coming Federal Reserve rate hikes. And few see housing resuming its role any time soon as the main provider of the fuel needed for a surge in U.S. growth.
"It's going to take a long time before you get back to that point," said Jennifer Lee, senior economist with BMO Capital Markets in Toronto. "It's going to take a while before it contributes meaningfully."
At its giddy heights a decade ago, total investment in residential housing accounted for more than 6.5 per cent of the U.S. economy. And the prebubble average was about 4.5 per cent. Between 2010 and 2012, the sector hovered at a low of 2.4 per cent.
So far this year, housing has regained some lost ground. climbing back to as much as 3.3 per cent. And next year, IHS Global Insight estimates its share of GDP will rise slightly to 3.5 per cent or 3.6 per cent.
"In general, it has been a slow, slogging recovery. But it finally seems to be finding its legs," said Tim Quinlan, an economist with Wells Fargo Securities in Charlotte, N.C. "When you look at the overall environment and all the major drivers of GDP growth in the U.S., the housing market is probably the one that's on the least shaky footing."
The picture may get a bit clearer on Tuesday, when the latest S&P/Case-Shiller index, new home sales for July and the Federal Housing Finance Agency (FHFA) house-price survey land. The influential Case-Shiller index tracks changes in resale prices in the top 20 U.S. metropolitan markets. It's value-weighted, while the FHFA index assigns the same weight to all sales, regardless of price.
All are expected to show modest gains.
Besides the housing data, investors will also be able to chew over the latest quarterly results of home builder Toll Brothers Inc., one of the U.S. housing industry's bellwether stocks. The largest U.S. builder of luxury houses is expected to report slightly improved earnings for its fiscal third quarter, reflecting rising demand in California.
U.S. house prices have climbed more than 5 per cent in the past year, and the Case-Shiller index is likely to underscore this improvement. Analysts expect a year-over-year gain of 5.1 per cent for June, up from 4.9 per cent in May. It will be "another Goldilocks increase – not too hot, not too cold," IHS Global Insight says in a note.
The consensus forecast for new home sales in July calls for an annualized gain of about 6 per cent to 511,000 units from the previous month, reversing a sizable 6.8-per-cent decline in June. But some analysts are more bullish. Bank of Montreal expects an increase of 7.3 per cent and IHS predicts the tally could be nearly 9 per cent higher. That would bring sales closer to the level in May, when seasonally adjusted sales climbed to 546,000, the strongest month in seven years.
"We're calling for what I would call a reasonable recovery," said Kristin Reynolds, senior principal U.S. economist with IHS in Lexington, Mass.
Multifamily starts are already back to prerecession levels in response to soaring demand for rental properties. But single-family housing has not kept pace. "We're calling for that to improve, and we think there's pent-up demand," Ms. Reynolds said. "The question is when that will actually move the housing market."
U.S. housing crashed in 2007, but didn't hit bottom until early 2009 and showed only fitful signs of reviving before 2012. Those grim years left deep scars on everyone from heavily indebted consumers and foreclosed homeowners to struggling builders and fearful lenders.
"This has probably been engraved in the American psyche," said Krishen Rangasamy, senior economist with National Bank Financial in Montreal.
A recent rise in household formation ought to be good for sellers. But just because young people are moving out of their parents' basements doesn't mean they're eager to load up on the debt needed to jump into home ownership. In fact, most prefer to rent. Hence, the surge in multiple dwellings.
Vacancy rates have dropped to their lowest in decades, Mr. Rangasamy notes. "It's no coincidence that the home ownership rate in the U.S. is also the lowest in over three decades."