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Market nsights

By BLU PUtnaM, cHief econoMiSt, cMe GroUP 15 MarcH 2012

US Housing Market Looking Brighter for 2012


The US housing sector is poised for a good year finally. It certainly has been a dark period for housing, yet the darkest hour is just before dawn. Housing was at the epicenter of the subprime mortgage crisis of 2007 and the financial panic of 2008. In a typical cyclical recession, as interest rates fall, the housing sector usually helps lead the economy back to healthy growth. In a recession caused by a financial crisis the lower rates are less relevant while the resulting deleveraging of the economy further depresses the housing market. By the end of 2011, new single-family home sales were running 77% below their peak in July 2005. There were just over 2 million new housing starts in 2005 and only 610,000 in 2011. The S&P Case-Shiller 10-City home price index peaked in April 2006 and had declined by 34% by the end of 2011. Even with all this bad news, there is reasonable cause for optimism in 2012. First and foremost, the terrible news for housing is both well recognized and behind us. The visible supply of home for sales has started to shrink a little. Home prices have established a bottom over 2010-2011. While distressed properties still account for over 20% of sales and many foreclosure sales are yet to come, the banks are feeding them into the market in an orderly fashion. Housing starts are even moving up, despite the bad news. Importantly, all signs of panic are completely gone.

Disclaimer. All examples in this presentation are hypothetical interpretations of situations and are used for explanation purposes only. This report and the information herein should not be considered investment advice or the results of actual market experience.

15 march 2012

Second, housing is now considerably more affordable than in the past. Lower home prices and low interest rates have put the purchase of a new home well within reach of many more citizens. This is a necessary, but not a sufficient condition, to breathe new life into the housing market.

Indeed, when one couples the improved affordability of housing with a better job market, there is only one thing left in the way of a recovering home market. the depressed level of home prices has many homeowners living in properties in which the current re-sale value is lower than their mortgage principal. There have been many impediments to refinancing underwater homes, yet more and more refinancings have been achieved. Eventually, a rising tide in the prices of homes can ultimately solve this problem. So while we are quite optimistic for a solid recovery in the US housing market in 2012, we cannot get positively ebullient until we see home prices rising. For 2012, we anticipate solid rises in new home sales and housing starts. Moreover, as home prices start to rise during 2012, this will allow the housing recovery to gain momentum in 2013 as the number of underwater mortgages is reduced.

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Third, what has been missing is the confidence of the consumer to re-enter the housing market. The determinants of confidence are elusive. We do know, though, that a more robust job market is helping build consumer confidence. Weekly new unemployment claims have been on a sustained downward path and are now in the territory that is associated with both healthy net new job creation and declining unemployment rates; both of which are showing up in the reported data.
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