Will the US housing market finally turn for the better and kick-start the economy?

10th February 2012

The only flaw in that saga is that we have had the decline but rather than rising like a phoenix from the ashes the US housing market has bumbled along the bottom at best and by some measures is still falling. Accordingly a key factor in the recovery from past recessions is missing. This troubles the US central bank or Federal Reserve greatly and it is currently involved in a US $600 billion attempted stimulus for the housing market called Operation Twist. If you read the speeches of Federal Reserve members they talk about the housing market almost as often as they talk about employment. Actually of course the two issues are interrelated and linked.

What is the current situation?

There was a report on this published yesterday.

"The Zillow Real Estate Market Reports, released today, show home values decreased 1.1 percent from the third to the fourth quarter of 2011 to $146,900. On an annual basis, this represents a 4.7 percent decline."

Ok, so we knew that 2011 was another weak year what are the signs now?

"December's data show that sequential improvements in year-over-year numbers have stopped, and the pace of monthly depreciation has once again picked up, with December's monthly depreciation rate at 0.6 percent."

On that troubling note what do they think might happen in the year to come?

"Positive developments will include markets showing organic growth, and home sales increasing as the year proceeds. However, we maintain our forecast that home values will continue to fall in 2012, with the Zillow Home Value Forecast showing a 3.7 percent decline through December 2012."

For those interested in a geographical breakdown the highest rate of price fall is expected in Atlanta and Chicago but before I worry that they are places I have visited I spotted that LA and Washington are expected to rise in price slightly.Phew! For those looking for a historical context we see this.

"Overall, national home values have fallen 24.2 percent since their peak in May 2007. Nationally, home values are back to late 2003 levels."

Care is needed with the forecast as it is a new development for Zillow but one might have expected some sort of recovery forecast which is partly why I took an interest.

Why might the US housing market recover?

Affordability has theoretically improved

As discussed above the US Federal Reserve is spending US $600 billion on Operation Twist to try to lower long-term interest-rates and therefore mortgage rates too. It seems to be having some success as the 30 year prime mortgage rate in California is 3.69% today and the 15 year rate is 2.96%. UK readers may be intrigued by the fact that a 20% deposit seems to make you a prime mortgage borrower in California.

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