THE reanimation of America’s housing market has been a long time coming. Residential building last contributed positively to growth in 2005. Housing-construction employment has dropped 43% since then. Government efforts to resuscitate the market have flopped. Yet tantalising signs of a durable recovery are emerging at last. The National Association of Home Builders’ index of builder confidence rose for a fifth consecutive month in February, to its highest level since May 2007 (see chart). Sales of previously-owned homes rose 4.3% from December to January. The housing overhang is receding. The number of homes for sale dropped 21% in the year to January, to just over six months of supply—a “normal” level.
The recovery is an odd one by American standards, centred on the rental market. Though house prices sank 4% in 2011, rents posted a 2.4% increase, thanks to tumbling vacancy rates. Tight conditions are a side-effect of the housing bust. Construction hit a record low in 2011, surpassing a 2010 performance which itself displaced 2009’s. The pressure from America’s growing population is now showing. Builders are responding. The number of new building permits jumped 19% in the year to January. Approvals for buildings with five or more units, which are favoured by renters, soared by 61%.
Meanwhile, adults who sheltered with friends or family during the recession are striking out on their own. A Goldman Sachs analysis reckons that growth in new households has been some 50% short of trend since the recession began, with over half of the shortfall coming from those aged 18-34. Goldman reckons the worst is over, and that the young should soon add to new housing demand.
Those rising rents make buying a bargain: as attractive as it has been for three decades, according to the National Association of Realtors’ index of housing affordability. Stocks of homes for sale are falling as investors snap up and convert vacant homes for renting out. Were it practical, mused Warren Buffett recently, he would buy up “a couple of hundred thousand” homes.
Yet despite this good news, housing finance is frail as ever. Lending rose in the fourth quarter of 2011, but stuck at the lowest level since 2000 for the year as a whole. The market is still working off sickly loans. New delinquencies are down sharply from 2008, yet more than $150 billion in home loans became delinquent in the fourth quarter of last year. More trouble lies ahead. Over 10m borrowers owe more than the value of their home. Banks are wary of new mortgages—and losses—while prices are falling. The Federal Reserve’s Senior Loan Officer Survey suggests that lending standards remain higher than at the height of the recession.
Washington remains behind the curve. Fearing for its finances, the Federal Housing Administration is increasing fees on mortgages it insures, which account for roughly a third of all new bank loans. A typical borrower’s loan costs may rise by just $5 a month, yet American Banker, a financial-services daily, suggests the rise could cut lending by billions of dollars. The Federal Housing Finance Agency is moving only slowly to pack foreclosed-on homes into bunches to be sold to investors for renting out. Thanks to those renters, the worst may be over. But it will be years before the mortgage market fully recovers.