The US housing market has clearly moved through the bottom of what has been a sustained and severe correction cycle.
Based on data from RP Data’s parent company, CoreLogic (NYSE: CLGX), the US housing market peaked way back in April 2006; between that time and the market trough in February 2012 (70 months), US house prices fell by just over 33 per cent.
Prior to the housing market crash in the US, home prices had been rising since early 1992, with the rate of growth gathering pace over time. The annual rate of growth peaked at 17.6% around mid-2005
The Australian housing market has shown some important differences to the US cycle. Although our combined capital cities index doesn’t extend back as far historically as the US index, it can be seen from the above trend lines that the Australian housing market showed a fairly similar rate of growth over the late 90’s, albeit with some movement, prior to 2001.
The ‘boom’ in Australian values between 2001 and 2003 far exceeded the rate of the growth being recorded in the US, however the corresponding cycle post 2003 was much weaker than what was recorded across the US market, with Australian values recording virtually no growth over the next two years.
Both the US and Australian housing markets are now on a recovery path, however once again there is a significant difference in the rate of growth being recorded.
In the US, based on the CoreLogic House Price Index (HPI), the market bottomed out in February last year and since that time prices have increased by 10.5% (an annual growth rate of 11.0%).
The rate of recovery across the Australian housing marked has been more measured. The local market bottomed out at the end of May last year, with values recording a 4.2% increase between the market trough and the end of April 2013 (an annual growth rate that equates to 4.5% per annum).
US house prices have now been increasing for 13 straight months. It’s worth delving a little bit deeper in the US housing market data to see what is driving the recent substantial upwards movement in home prices. Some of the reasons CoreLogic points to are:
- The US economy is getting close to its fourth year of expansion. The US economy grew by 2.5% over the first quarter of 2013, largely fuelled by residential investment (ie dwelling construction) which was up 14% over the second half of 2012.
- The strongest recovery trends are being recorded in those areas that have either recorded a more significant correction in dwelling values or a high level of new housing construction. The graph below is taken directly from CoreLogic’s recent ‘The Market Pulse’ newsletter (anyone who is interested in the US housing marked should subscribe… it’s free and packed with the best housing market analysis available in the US), the Census Divisions that have recorded some of the largest losses are now showing some of the largest price bounces.
- The number of mortgages in delinquency (mortgages that are more than 90 days in arrears) are drying up. According to CoreLogic the number of delinquent mortgages has fallen by a third since arrears peaked back in January 2010.
- Distressed sales, as a proportion of all sales, have improved over the past couple of years which is also helping to improve housing market conditions. CoreLogic estimate that 22% of all sales in March were distressed, which is still very high, but better than the 26% being recorded a few years ago.
- Buyer demand is increasing also, with the number of dwelling sales 9% higher in March compared with the same time last year. Importantly, REO sales (real estate owned (REO) properties are dwellings that are owned by a financial institution which they have acquired after an unsuccessful short sale or foreclosure auction) were 24% lower compared with a year ago and short sales (ie where a home is sold for less than the mortgage amount on the property) were 28% higher than a year ago, which suggests that both owners and banks are more willing to accept a loss on the property in order to move on.
Overall, the housing market in the US is recovering at a significantly faster pace than what we are experiencing here in Australia. Keeping in mind though that we still need to see US prices increase by a further 26.5% before the market broadly returns to the pre-crash peak.
The US dynamic is quite different to what we have here in Australia and many of terms used in the US are foreign to our market due to the differences in our financial systems, regulations and availability of data.
The Australian market recovery is more measured and consumers largely remain cautious and conservative, a fact which is reflected in the most recent consumer sentiment date released by Westpac and the Melbourne Institute.