Housing Rebound Head-Fake
WSJ ECONOMICS BLOG
At first glance, it looks like U.S. housing may have hit bottom, notes Capital Economics. The index of homebuilder sentiment has been steady (albeit at low levels) for three months, the pending home sales index has rebounded, and housing starts didn?t fall much in November.
?Unfortunately, all the evidence suggests that, at most, the housing market is enjoying a brief respite before the downward trend re-asserts itself in the new year,? the London-based consultancy says in a report.
First, the rate of change in the homebuilders? sentiment index is still consistent with falling housing starts.
Second, even if starts have hit bottom, the lags involved in the construction process means, the ?the number of homes under construction and reaching completion would still continue to fall for at least another eight months.?
Third, and most important, it?s really no longer about housing construction; it?s about home prices. ?It is falling house prices and the impact they are likely to have on consumption and mortgage defaults that represent the biggest risk to the wider economy over the next 12 months,? the firm notes. Prices could fall up to 10% in 2008, the firm says. That would weaken consumer spending, undermine collateral values of more mortgages, and lead to more defaults and financial sector losses. – Greg Ip |
