After reviewing a housing market yesterday that is in in the post-boom crash phase (the Netherlands) I will today look at one which has been in the recovery position in 2013 so far. The United States housing market has seen strong price gains so far this year as illustrated below.
Data through May 2013, S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, showed increases of 2.5% and 2.4% for the 10- and 20-City Composites in May versus April.
Indeed a couple of US cities even returned to pre crisis levels as we wonder what it is about the letter D.
Dallas and Denver reached record levels surpassing their pre-financial crisis peaks set in June 2007 and August 2006. This is the first time any city has made a new all-time high.
Looking further into the numbers it is hard not to be struck by the fact that the annual rate of change of house prices registered by this index rose to 12%.
In May 2013, the 10- and 20-City Composites posted annual increases of 11.8% and 12.2%, respectively.
Actually this starts at this point to look like a new bubble but a little care is required here because there were substantial downward adjustments in US house prices as the credit crunch hit. They remain a fair distance below the pre credit crunch peaks.
As of May 2013, average home prices across the United States are back to their spring 2004 levels. Measured from their June/July 2006 peaks, the peak-to-current decline for both Composites is approximately 24-25%.
Okay so what is the size of the current rally?
The recovery from the March 2012 lows is 15.9% and 16.5% for the 10-City and 20-City Composites.
Or if you prefer a graphical format courtesy of the St.Louis Federal Reserve.
Looked at like that we see that the United States did have an overall house price adjustment which was quite substantial. Even now there is a long way to go to reach the previous peaks or if you prefer quite a fair bit of the previous bubble was reversed and wiped out.
Care is needed
At first it looks as though this is something of a conventional recovery for a housing market which has been allowed to fall in price to a “market-clearing” level. Although even here we of course find that this involves substantial reductions in interest-rates as the US Federal Reserve cut its fed fund rate to between 0 and 0.25% in late 2008 from the peak of 5.25% in 2006. So unless they are willing to take official interest-rates into negative territory they have “maxed-out” that particular weapon.
In addition we have seen considerable intervention via a type of private-sector quantitative easing in the mortgage market. This indeed is on-going as shown below.
Since the beginning of the financial market turmoil in August 2007, the Federal Reserve’s balance sheet has grown in size and has changed in composition. Total assets of the Federal Reserve have increased significantly from $869 billion on August 8, 2007, to well over $2 trillion.
Actually the Federal Reserve is being a little coy there as whilst it is true that $3.6 trillion is “well over $2 trillion” they could be much clearer.
All of these purchases would have an indirect on the mortgage market via two routes. Firstly such a large amount of buying is likely to have an effect on prices and yields. Secondly and often forgotten is the issue of quantity as more bonds (both private and public) are likely to be able to be issued. The latter is of course more intangible and hard to quantify.
However there has been a direct effect from the US $1.3 trillion of US mortgage-backed securities that the Federal Reserve has purchased as of Wednesday. This is ongoing as it had bought US $18 billion in the previous week and US $407 billion in the previous year. So we move further away from thinking of a “market clearing” price level as it in fact involved a fair amount of intervention.
Also if one considers the balance sheet of the Federal Reserve how does it feel to be holding US $1.3 trillion dollars of the worst of debt whose misrepresntation as “AAA” was one of the causes of the crisis? There are bound to be at least some of what the Bank of England christened “phantom securities” in the Fed’s portfolio and if I was a US taxpayer I would be concerned about how many there are!
Oh and on the central planning front there was also the HARP (Home Affordable Refinance Programme) and the HAMP (Home Affordable Maintenance Programme).
Suddenly it looks a lot less like a market-clearing level of prices does it not? Indeed one may well wonder if the UK authorities took a few hints from what has taken place.
The US Economy
The International Monetary Fund details the impact of the US housing recovery on the wider economy thus.
Home sales increased by more than 15 percent over the same time period. Thanks to higher house prices and the positive effects of government housing finance programs, fewer homeowners are “underwater” (owe more on their mortgages than their houses are worth) or are behind on their mortgage payments, and fewer houses are entering foreclosure.
So we have an element of “feel-good” improvements combined with rising house prices and higher economic activity in this area. The IMF feels that this will carry on although I note that it then contradicts itself.
there is scope for additional measures
Many will feel that there have already been rather a lot of measures and will wonder at what if any stage the recovery will allow their unwinding. So we have yet another sphere where an exit strategy never seems to arrive.
This is an area of concern for the US housing market and the situation has developed considerably this week as US Treasury Bonds have again fallen in price and risen in yield. After a lag this is followed by mortgage rates and the 30 year mortgage rate has risen by just over 1% since the beginning of May to 4.4%. If we look back in history we note that this is still a long way below the average for this series but we have seen a sharp jump.
According to the Mortgage Bankers Association this is having an impact.
The Market Composite Index, a measure of mortgage loan application volume, decreased 4.7 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 5 percent compared with the previous week.
Of course that is only one week’s data! But the next few releases will be poured over.
As we undertake today’s journey several of the themes of this blog entwine. As we look at the scale of the centrally planned intervention in the US housing market it is hard not to wonder if this rally will fade like the one of 2010 shown in the graph above. Let us hope not. But also the size of the interventions reminds us again of the problem that comes under the heading of “exit strategy” from all the monetary stimulus measures. There is some US $1.3 trillion of mortgage debt on the books of the US Federal Reserve as we wonder if the privatisation of profits, socialisation of losses theme is again in evidence.
As ever the picture is complex. Regular readers will be aware that I have long feared the stage when bond yields start to rise again, something which has differentiated me from those who argue that “this time is different” and that they won’t or can’t or both. The last 3/4 months have seem some of this, but the move has been sharp in both the UK and the United States and at some point we are likely to see a correction. In such an environment we may see bond yields slowing the US mortgage and housing markets just as the yield rally fades.
But I will leave you with a final thought which is that if we move into an era of bond yields rising on a sustained basis it will represent quite a change as my whole career has been marked by an overall reduction in bond yields.