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USA: A housing-led recovery

by Paul Lahiff4 minute read

Most economists argue that housing can be a great boost to economic recovery, with the only difference being on how big the impact is.

The recovery in the United States lends significant support to those who argue it helps a lot.

The dark days in American housing and housing finance post GFC are now long gone with the housing market moving into the northern summer with gusto. Existing home sales rose at around a 5 million unit pace with prices also moving higher with distressed properties (where the selling price is lower than the outstanding debt on the property) at their lowest level since 2008.

This phenomena is so pronounced in some regions that all-cash offers reached a third of all sales in Los Angeles in June and almost two thirds in Miami.

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According to the New York Times, all-cash buyers are typically investors who look to renovate and quickly resell or rent these homes. In turn, this is causing first-time buyers to be shut out of the market with home ownership falling to an eighteen year low of 65 per cent.

The downside to this is that many American commentators are predicting an indefinite continuation of this with material consequences.

The argument goes that investors are buying rental properties because the recession has turned many households into renters including those who lost homes to foreclosures and those who might have bought but for job loss and high debt.

The New York Times argues that “given the traditional role of home ownership in building wealth, fostering communities and driving the economy forward, a lower rate of home ownership is a troubling development.”

A more immediate concern to housing recovery is the prospect of the Federal Reserve beginning to “taper” its policy of quantitative easing of monetary policy. However recent comments by Fed Chairman Ben Bernanke have dampened this prospect. In any case, mortgage costs relative to annual incomes are still extremely low – around 17 per cent compared to a 24 per cent historic average – so there appears to be scope for mortgage rates to rise further without killing off the housing recovery.

Parallels to Australia – yes there are some with investors fuelling most of the recent growth in housing finance here (up almost 24 per cent over the past year) and first home buyers crowded out of the market and running well below long term average (14.6 per cent in May compared to 18.1 per cent a year earlier).

paul lahiff

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