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US housing market sees rise, say economists

Low mortgage rates sees builders taking on new projects

Gulf News

The US housing market in May probably managed to sustain recent gains, driven by low prices and borrowing costs, economists said before reports this week.

Home starts climbed 0.4 per cent last month to a 720,000 annual pace, matching January as the fastest since October 2008, according to the median estimate of 64 economists surveyed by Bloomberg News before a Commerce Department report June 19. Sales of previously owned houses held near the highest level in almost two years, another report may show.

A drop in home prices and record-low mortgage rates are combining to underpin demand and prompt builders to take on new projects. The improvement comes as other parts of the economy, including manufacturing and consumer spending, are softening, which may give Federal Reserve policy makers reason to consider taking further action to spur growth when they meet this week.

“Housing seems to be the one thing that’s doing better in this economy,” said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh.

The outcome of today’s election in Greece could determine whether the euro area crisis worsens. Heads of the Group of 20 nations, including President Barack Obama, are also gathering in Los Cabos, Mexico, as global markets look to Europe’s leaders for a clearer sign of the path forward.

A failure to stem the euro-area crisis would add to risks of a bigger slowdown in the US economy. The Federal Open Market Committee, which sets the course of central bank policy, meets in Washington on June 19 and 20 to decide whether to take additional steps to boost growth.

Record affordability

Against the backdrop of the cooling global economy, cheaper properties, rising household incomes and low mortgage rates combined to push home affordability to an all-time high in the first quarter, according to the National Association of Realtors. The average rate on a 30-year, fixed-rate mortgage reached a record low of 3.67 per cent in the first week of June, according to Freddie Mac.

The Washington-based National Association of Home Builders/Wells Fargo index of builder confidence, to be released tomorrow, is projected to ease after reaching a five-year high in May, according to the median forecast in a separate Bloomberg survey.

Investors are betting on further gains in housing. The Standard & Poor’s Supercomposite Homebuilding Index has climbed 28 per cent this year, outpacing a 6.8 per cent gain in the broader S&P 500.

More households

Another reason for optimism on the housing front is that Americans are forming households faster than new homes are being built, said Douglas Yearley, chief executive officer of Toll Brothers Inc, a luxury homebuilder based in Horsham, Pennsylvania.

“There is huge pent-up demand that has built over the last four years from this imbalance,” Yearley said at a June 14 conference. “It’s been seven years since this all began to turn down and you have people that are just ready to move on with their lives, take advantage of great interest rates.”

At the same time, three years after the end of the recession, a sustained real-estate rebound continues to prove elusive. More distressed properties are entering the market, adding to inventory and pushing down prices.

Foreclosure starts grew in May on an annual basis for the first time since January 2010 after loan servicers settled with states over faulty documentation, according to a report last week from data provider RealtyTrac Inc. Home seizures plunged 18 per cent from a year earlier, the Irvine, California, company also reported, as banks seek alternatives to repossession.

Debt concerns

Weak job gains and stock market volatility also have consumers apprehensive about taking on debt.

“Our forecast is still for growth, but we’re being conservative about it,” said Doug Duncan, chief economist at Washington-based Fannie Mae. “This will definitely be a year where we’ll see growth in the housing market.”

The number of previously owned homes sold in May probably dropped to a 4.56 million annual rate from 4.62 million the prior month, according to the median estimate in a Bloomberg News survey. Purchases reached a 4.63 million pace in January, the fastest since May 2010. The National Association of Realtors will release the data on June 21.

“We’re bumping along the bottom,” said Mike Schenk, senior economist at the Credit Union National Association in Madison, Wisconsin. “The housing recovery is going to be a long, slow affair.”

Leading index

The index of leading indicators rose 0.1 per cent in May after declining the month prior, according to a median forecast of economists surveyed. The New York-based Conference Board's figures will be released on June 21.

Another report the same day may show factories are feeling the effect of slowing demand in Europe. Manufacturing in the Philadelphia region stagnated this month, economists project before a Federal Reserve Bank of Philadelphia report. Its general economic index will rise to zero, the point between contraction and growth, after reaching an eight-month low of minus 5.8 in May, according to the median forecast of economists in the Bloomberg survey.