When American house prices finally started rising in June last year, ending a three-year decline, homeowners and economists rejoiced. The steep plunge in values, about 33% nationally from peak to trough, caused widespread damage in the American economy and abroad. The stabilisation of prices turned out to be a precursor to broader economic recovery. Since bottoming out between May and June, prices have ticked upwards every month, while sales have risen from their recession lows. And yet gloom persists. The pace of foreclosures has not abated.
Worse still, the momentum now seems to be ebbing. Mortgage applications for purchases fell sharply in November, to their lowest level since 1997. Confidence among home-builders declined in November for a second consecutive month. And figures released on January 20th showed that new housing construction, which recovered from the record lows of early 2009 to plateau late last year, fell by 4% between November and December. The fear is that prices will soon start to fall again, touching off another round of pain for homeowners, workers and banks.
Government support boosted house prices by about 5% last year and the bulk of the support, are due to end in March. As their end approaches concern has grown, not least because the underlying fundamentals remain shaky. With many mortgage loans underwater, continuing job losses are pushing ever more households into default. Nearly 3m properties entered foreclosure last year, and filings increased by 14% from November to December. Foreclosures place downward pressure on house prices, contributing to a vicious cycle of economic pain.
The end of government support will put housing markets under great strain. It is a difficulty the American economy had better get used to.
(Source: The Economist)
(Image source: Dryicons.com)
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