The Real Estate Market :: United States
At the end of 2005, total investment on housing and Real Estate accounted for 6,1% of GDP, a record; in 2000 the investments on housing and RE stood at 4,6% of GDP.
The push given to the housing sector by Hurricanes Katrina, Wilma and Rita was certainly highly significant, just for the fact that over a million houses were damaged and repaired (or under repair) during the last year; both the permits for new houses and the new builds showed signs of an impressive growth in the first quarter of 2006, the first with an increase of 4% on the same period of 2005, the latter showing an increase of 13% on the same period of 2005 for completed houses, an increase of 8% for houses under construction and a +2% for housing starts.
While on the production side, data point to a very resilient market, the same cannot be said for the demand side, where signs of a slowdown are creeping in; new home sales have gone down by 7% in March 2006 compared to first quarter 2005 and existing home sale have decreased by 2%. The number of new houses for sale has increased by 24%, while the number of existing homes on the market was 39% above the level of March 2005.
So far, the highlighted excess of supply has not had any significant impact on house prices, showing no signs of falling from the new records. The average price of new homes sold during the first quarter of 2006 was 290.100 Dollars, with an increase of 1% compared to the previous year; the average price of existing homes showed an increase of 6% to 266.000 Dollars. According to the HPI index, house prices have more than doubled in the last ten years (source: OFHEO). The national ownership rate stands at 68,5%, slowly decreasing.
Now that the strong downward momentum witnessed by the equity market during years 2000-2003 has eventually come to an end and the same has happened with the low-interest rates policy, the Real Estate Market in the United States does not seem set to maintain the skyrocketing performance experienced during the last ten years; in the most likely scenario, next annual increases in house prices will trail the inflation rate, as occurred during years 1990-1995. Builders’ views of the market are getting less positive, as shown by the NAHB Housing Market index, falling back to the 1995 levels.
Nonetheless, we do not agree with some apocalyptic predictions foreseeing a nosedive fall in the Real Estate market, specifically caused by the rise in interest rates.
Despite the 400 basis points increase in the Fed Funds rate during the last 2 years, the mid and long term interest rates are still considerably lower than the 20 years average. The effective mortgage interest rate for fixed loans stood at 6,57% on March, 31 2006, with an average term to maturity of 28,7 years. The average adjustable mortgage rate on March 2006 was 6,23%, with an average term to maturity of 30 years (source: Federal housing finance board). Overall steady from the beginning of 2003 to the end of 2005, fixed mortgage rates have just recently known a significant rise; the current level is now 60 basis points higher than in March 2005, still, fixed mortgage interest rates are 170 basis point lower than in mid 2000.
We think that the highlighted signs of a slowdown in the housing market, having been in a positive market cycle for more than 30 years, are not to be considered the beginning of a crash but the start of a consolidation phase, very well welcomed.
Last Update: June 2006 |
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