A confidence hit for US housing?

By Leith van Onselen

On Friday, I argued that the US housing market was experiencing a tentative recovery based on the fact that: 1) house prices had finally begun to increase, rising by 5% since their January 2012 lows; and 2) the number of dwelling starts in December rebounded to their highest level since June 2008.

Over the weekend, the University of Michigan Consumer Sentiment Index was released for January, which registered a preliminary fall in the index to 71.3, down from 72.9 in December. It was the second consecutive monthly fall in the index, with sentiment falling by -11.4 points sinceĀ  November 2012. It also represented the lowest consumer sentiment reading since December 2011 (see next chart).

The result is potentially important for the US housing market, since there appears to be a strong correlation between consumer sentiment and US house prices, with sentiment typically the leading indicator (see next chart).

While the relationship between consumer sentiment and housing starts is less clear, there does also appear to be a clear correlation between US house prices and housing starts (see next chart).

The sharp fall in US consumer sentiment between November and January appears to have been heavily influenced by the hoopla over the US Fiscal Cliff, which was largely averted when Congress struck a deal on 1 January, but left most Americans with less disposable income courtesy of the removal of the 2% payroll tax holiday.

However, with the deadline to raise the US debt ceiling now approaching fast (it is expected that the Federal Government could run out of funds by early March), and acrimonious congressional debate likely to ensue, there is the likelihood that consumer sentiment could take further hits over coming months, thereby threatening to halt the US housing recovery if the situation is not resolved promptly.

Unconventional Economist


  1. They were expecting a fall in confidence as we approached the debt ceiling – weather can play a part too at this time of year. The issue will be whether the index rights itself post debt ceiling.

  2. It would seem even if there were a global crash that buying in the US is still a far better option than buying here.

    • after 40% or so price fall, buying in USA seems to be very good option. For a long time there was no better time to buy in many US cities.

      Prices have to increase by 10-20% to reach “real” levels in many US cities. In Phoenix, for example, prices increased 20% over the last year or two but are still 45% below the peak.

  3. In the US it will be how sequestration is handled. If the pre-agreed dafault spending cuts kick in because no new agreement is reached there will be deep fiscal cuts that probably drive the US into recession. If sequestration avoidance deal is not reached early then uncertainty will cause problems. If a deal is reached in a timely manner, then the outcome will depend on the actual deal and timing and quantum of cuts and could be very sectoral or income demographic driven eg defence industry or social support dependent.

  4. All “USA aggregate” data involving housing is now just as useless as aggregate data for “the EU”. We need to know what is going on in California, Florida, Texas, New York, Illinois, North Carolina, etc; just as we need to know what is going on in Germany, Spain, Italy, France, etc