U.S. housing crisis not over yet

I know I’ve written about this a few times, but I know some Australians are still considering investing in USA property so once again I’d like to warn them that the US housing crisis is not over yet.

The Winnipeg Free Press recently reported that at the ripe old age of five years, America’s housing bust is still very much alive and kicking.

House prices dropped 3.3 per cent in the year to February according to the S&P/Case-Shiller index, the fastest decline since November 2009. The Federal Reserve’s preferred measure, the CoreLogic house-price index, showed an even worse one-year decline of 7.5 per cent in March. And Zillow, an online real estate database, recently said that prices fell 8.2 per cent in the year to March. Zillow has reported falling prices for 57 consecutive months.

The latest housing hiccup has Americans worried that a new phase of the crash is under way.

Two years ago, housing appeared to hit bottom. Prices and sales leveled off thanks to low interest rates and a generous housing tax credit. But that respite ended last summer. The tax credit expired just as a broader economic chill descended, and price declines resumed.

Some forecasters expect another five per cent to 10 per cent fall in prices before the market rights itself. Robert Shiller, of Case-Shiller index and irrational exuberance fame, thinks a further 25 per cent decline is not out of the question.

That would mean big trouble for the economy.

Reductions in construction jobs limit growth, further depressing housing markets. As prices fall, existing mortgages look less affordable and defaults rise.

Banks and the two government-sponsored mortgage giants, Fannie Mae and Freddie Mac, are already laboring under the strain of huge portfolios of foreclosed homes. Bulk selling by Fannie and Freddie helps explain the faster decline in prices this year. With default rates high, banks are demanding better credit ratings and larger down payments than first-time buyers can manage.

But there are signs this may be the darkest hour just before the dawn. House ownership is beginning to look more affordable by many measures. Adjusted for inflation, prices are close to their long-term trend after the bubble years of the 1990s and the first years of the 2000s. And the ratio of house prices to rents has returned to its pre-bubble level.

Other numbers are looking a lot better. Vacancies for apartments tumbled in the first quarter of the year and are now at a three-year low. Rents have been rising, and analysts expect them to increase by over four per cent this year and next. Rent rises typically support house prices by making home ownership more attractive.

With uncertainty in the US economy and more troubles ahead for the US housing markets, Australian investors should steer clear of things they don’t understand.

Source: Winnipeg Free Press


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