Taking stock of US housing

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The housing crisis in the US is only worsening, according to every recent measure, ranging from housing ‘starts’ to new home sales. Rising foreclosures and higher inventory are causing price declines which, in turn, results in falling demand for new homes, thus widening the supply-demand gap. It is a vicious cycle, which many hope will be broken by the Government’s rescue package for housing.

Jobs lost till now!

Housing starts in the US, which measure the number of houses under initial construction, declined 17 per cent in January 2009 to 466,000 units, down 56 per cent on a year-on-year basis. Home- builders have been trying to hastily cut back on supply to match falling demand. The declining ‘starts’ means more construction jobs might come under the axe. That will have its ripple effect as this may prompt construction workers to cut back on their spending.

Greater supply than demand

On the flip side, declining housing starts can be a positive, as it could shrink the inventory outstanding in the market. The US market has about 10-months supply of homes as against 5-months supply that is typical in a normal housing market. But rising foreclosures are adding to the supply in the market, compounding the problem. An estimated 45 per cent of the homes sold in the US are now foreclosed homes. Foreclosures not only bring fresh supply to the market, but also bring down prices as sales are made at below fair-market prices.

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Home prices have been on a steady decline in the US for two straight years. The median price of existing homes is down nearly 15 per cent on a year-on-year basis as of January. While the average value of homes have declined by more than 25 per cent since mid-2006, fear that home prices will plunge further combined with job uncertainty has curbed demand for resale as well as new homes.

According to the Commerce Department, sale of newly constructed homes fell 10 per cent in January. The National Association of Realtors reported that sale of existing homes declined by about 5 per cent.

Given that housing has a huge multiplier effect on the economy, fixing the problems in this sector is among the Obama administration’s priorities, as it tries to revive the economy.

Housing package

President Obama announced a $275-billion housing package aimed at stemming foreclosures and price declines and enabling responsible home-owners to retain their homes. Proposals include allowing those who cannot afford their mortgage payments to refinance their loans at lower interest rates and providing banks with incentives to modify interest payments so that people who face the threat of foreclosures can remain in their homes.

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However, the market doubts the effectiveness of the package, with few details on exactly which homeowners will be eligible for its benefits. More details are expected on March 5.

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