Working Papers

US Housing Downturn All But Over

Traxis Partners MD Cyril Moulle-Berteaux argues the US housing downturn is all but over:

In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.

The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in “months of supply” terms. That’s the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.

Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.

Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won’t stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.

posted on 06 May 2008 by skirchner in Economics, Financial Markets

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Stephen, enter “housing” into the search box on the LHS and see what you were writing about the US housing sector in 2006.

I found 8 or 9 posts all suggesting that there was no “bubble” in US house prices, and any downturn would be managable, and have no effect on the real economy.

You seemed to go very quiet on this topic during the course of 2007 as the sub-prime crisis deepened.

Its true we may not see a technical recession in the US, but there is most certainly a crisis in the financial sector, and we have had two consecutive quarters of anemic growth (and the pathetic performance if the US dollar in recent years is hardly a vote of confidence in the US economy).

In short I’d say you were dead wrong about US housing two years ago.  There was a bubble, and the effects of the bursting of the bubble have been profound.

Nowhere in your posts of 2006 were you warning of the dangers of sub-prime loans, and possible consequences for the stability of the financial system.

Given this history, I will take any announcements that the US housing downturn is over with a grain of salt.

Posted by .(JavaScript must be enabled to view this email address)  on  05/06  at  08:01 PM

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