On Friday, the White House released the Economic Report of the President, which is a 456-page report compiled by the White House Council of Economic Advisers assessing the major forces driving the US economy. On pages 71-72 of the report is the below gem showing that US housing has returned, more or less, back to fundamental value as measured by house prices versus rents (see next chart).
Following large declines from 2007 through 2011, housing prices bottomed out in early 2012, and rose 8.3 percent over the 12 months of the year, according to the CoreLogic home price index. Private sector housing experts expect house prices to appreciate at a 3.0 to 3.5 percent annual pace for the next several years. Because households have a choice between renting and owning a home, the price of new homes should increase in tandem with rental costs, at least over long periods of time. As seen in Figure 2-11, house prices increased to a level above parity with rents during the mid-2000s but descended to a level consistent with rents by the end of 2011.
The report also notes the nascent rebound in housing construction (see next chart).
Housing activity firmed markedly in 2012 and, although the level of activity remains low by historical standards, the recovery in the sector finally appears to be gaining momentum. On the production side, new housing starts increased to an annual rate of 900,000 units by the fourth quarter of 2012, up from an annual low of 550,000 units in 2009, and 610,000 units in 2011 (Figure 2-10). Demand for housing has also increased, with new and existing home sales reaching their highest levels of the recovery period during 2012. Similarly, inventories of unsold new homes have fallen to their lowest ever recorded level.
There is a strong correlation between dwelling starts and house price growth (see next chart), suggesting that US house prices will need to continue rising in order for the recovery in housing construction to be sustained.
However, Consumer Confidence data on Friday did throw a spanner into the works of any seamless recovery, confirming that austerity is weighing upon consumers. The University of Michigan released consumer sentiment data on Friday, which registered a large -5.8 point fall to 71.8 points in March from 77.6 points in February. It was the lowest reading since December 2011, was well below the long-run average of 85.2 points (see next chart) and was a new low for recent move, suggesting that for now at least the rebound in confidence has run its course:
According to Reuters, the biggest factor weighing on sentiment was the $85 billion of across-the-board spending cuts by the Federal Government, which came into effect at the beginning of March after US lawmakers failed to reach a deal on government finances:
A record 34 percent of respondents made unfavorable references to government economic policies, beating January’s prior record of 31 percent.
“The frustrations expressed by consumers essentially involve how little consideration has been given to how the government’s inability to reach a compromise affects people’s economic situation,” survey director Richard Curtin said in a statement…
Thirty percent of consumers expected the pace of economic growth would worsen in the coming year, up from 22 percent the previous month, while 38 percent expected the unemployment rate to increase, up from 27 percent.
Consumers were also more pessimistic about the outlook for their own finances, with just 20 percent expecting their situation to improve this year, a record low for the survey.
The slump in consumer sentiment does pose a headwind to the nascent housing recovery. The University of Michigan Consumer Sentiment Index is generally a good leading indicator for US house prices. And the recent slump in the index suggests that house price growth could soon stall (see next chart).
