Existing Home Sales to show a stalling US housing market

23rd June 2014 By: Eimear Daly

The housing market has been specifically pinpointed by the Federal Reserve as the US’s one domestic risk to growth and, although housing transactions have rebounded from the lows seen during the winter freeze, they still remain below December levels.

The failure of the housing market to rebound faster underscores the broad downtrend in the sector since the US first proposed reducing mortgage-backed securities asset purchases from mid-2013. The result of sharply higher yield on MBS was an immediate falloff in the number of mortgage applications and this translated into a slowdown in new home sales, building permits and housing starts. Effectively the US housing market is stalling and no longer helping to drive the economy back to health.

US Existing Home Sales, the broadest measure of housing market activity, is now down at a level not seen since July 2012, when Federal Reserve purchases of MBS was first introduced.

The US never had a real recovery in its housing market. Activity was artificially stimulated by the Fed’s large-scale purchases, and now, as the central bank winds down asset buys, the US housing market is inevitably slowing.

The prevalence of multi-family housing over single-family homes shows that there is an ongoing cultural shift in the US, away from home ownership to renting. The US subprime housing crisis is still a painful memory, and so to is the aftermath of household deleveraging. Affordability is also driving this cultural shift. The Fed’s aggressive bond buying took US household net worth up to its current 10.8 per cent annual increase, but this favours the wealthy, who are the majority of asset owners. In contrast, average weekly wage growth stands at only 2.1 per cent, and for less qualified workers only 1.9 per cent, significantly below a historical average of 5 per cent. Lower-income workers are the main purchasers of homes in the US, and meagre wage growth, rising house prices and now higher interest payments are forcing them out of the market.

US Existing Home Sales monthly growth will fall in May, though avoid outright decline. The housing market will continue to pick up after a weak first quarter, but it won’t jumpstart its stalling recovery, as the Fed removes its essential support.