Housing Markets Remain an Object of General Concern

July 12, 2010

Early next month will mark the the third anniversary of the financial market crisis.  It began when falling U.S. housing prices crippled the sub-prime mortgage loan market.  In the darkest days of the ensuing global recession, it was common for analysts to answer those asking “where’s the bottom and when?” with an assertion that self-generating economic recovery would have to wait for housing markets to stabilize and then show some improvement.

U.S. indicators in this sector have lately taken their lumps, partly because of the removal of tax incentives.  Pending home sales plunged 30% in May.  Construction spending that month was 8.0% lower than a year earlier and off 0.2% from April.  New and existing home sales sank by 32.7% and 2.2%, while housing starts and permits recorded month-on-month drops of 10.0% and 5.9%.

Construction in the euro area and Japan also remains depressed.  Construction spending in Euroland contracted another 4.1% in the first quarter and 10% from a year before.  In April, a further 0.3% dip was posted.  Residential construction in Japan was 18% less in 1Q10 than in 1Q09.  Housing starts and construction orders in April-May were down 2.0% and 7.9% from the same months of 2009.

The latest issue of The Economist publishes its quarterly house price study.  Booms in Asia have resulted in on-year price advances of more than 25% in Singapore and Hong Kong, 20% in Australia, and over 10% in China.   Although still trending lower, Japan’s market was found to be almost 35% undervalued in a comparison of the price/rent ratio now to the long-term average.  Estimated over-valuations exist on similar grounds of 17-20% in Singapore and China and over 50% in Hong Kong and Australia.  Spain’s housing prices appear around 50% overvalued.  Most other Euro zone members also have over-valued markets, with the notable exception of Germany whose market seems almost 15% undervalued.  U.S. housing prices have shown renewed underlying softness and remain overvalued when using the Federal Housing Finance Agency figures.

Distressed housing markets depress bank balance sheets, create investor uncertainty, and hurt consumer confidence and ability to spend in collateral ways. Markets inherently overshoot, yet only Germany and Japan among countries examined seem to have markets where that has already happened in a significant and unambiguous way.

Copyright Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



Comments are closed.