Even though financial headlines across the US have become more positive over the last few weeks there are still significant concerns that the US housing market has not yet entered a period of recovery. If you were to watch the news, the government initiatives and comments you could be mistaken for assuming that the recovery had already begun. So what exactly is going on with the US property market?
The US property market
In many ways it is difficult to talk about the US property market as “one” because the country is so diverse and so enormous that we are seeing significant swings from state to state. However, on the whole we have seen property prices in the US fall by over 30% since their 2006 highs and despite signs earlier this year that buyers were coming back to the market, February and March were difficult times for the sector.
There is no other country in the world which is feeling the pain of home repossessions to the level seen in the US. When you consider that the sub-prime lending market was the catalyst for the credit crunch it is not difficult to understand exactly what is going on across the country. Literally millions of homes in the US were acquired using finance which was being offered to customers who had little or no chance of ever repaying it, in the event the property market collapsed. As sub-prime lenders chased profits at the expense of risk we saw more and more homeowners struggling to cover their mortgage payments, which placed more and more pressure on the sub-prime sector.
Once the sector imploded this was the catalyst for an overnight freeze on the worldwide money markets and the ongoing impact we are still feeling today.
Home sales in the US
January and February this year saw an increase in the number of homes sold in the US which initially gave the markets are a significant boost. However, these figures fell flat in March and the February figure was later revised downwards, taking much of the wind out of the sails of the US property market. This ongoing reduction in the value of US homes is happening against a background of record low mortgage rates which will at some point help to kick start the market recovery.
However, one alarming element of the increase we saw in January was the fact that approximate half of all homes sold in the US were in fact the result of foreclosures. This would indicate that while there are “bargain hunters” in the market there is no real natural demand as yet. On the positive side it was interesting to see that around 50% of those acquiring new properties in the US in January were first-time buyers, which some people saw as a sign of increased confidence in the economy and a return to “normal levels”.
The US economy
Despite the increase in optimism since Barack Obama moved into the White House there are real concerns that the US economy, and any potential recovery, is literally on a knife edge. Unemployment continues to rise and will have a significant impact on the performance of the economy for some time to come. Even though the US as a whole is suffering a significant economic downturn it would appear that slowly but surely whole cities, and surrounding areas, in the US are suffering “depression like” falls.
The US government has pumped trillions upon trillions of dollars into the US market and while there have been signs of improvement in some areas there is still much work to be done. Areas such as California, Florida, Nevada and Arizona have suffered massive reductions in property prices although when you bear in mind these are some of the areas which benefited most from the previous property boom it will come as no surprise.
Shadow property sellers in the US
While the official number of properties for sale in the US appears to be balancing against the number of potential homebuyers in the country, there are concerns regarding “shadow property sellers”. It would appear that there are many homeowners in the US who are struggling financially and potentially on the verge of foreclosure, and are looking to downgrade their property. These are the type of property owners who have yet to place their properties on the market although at the first glimpse of a potential recovery we could see a significant increase in supply to the market.
As ever, where supply continues to outstrip demand they will be pressure on prices which will push the US property market into a further downward phase.
Overseas investors in the US
The US property market has been a great benefactor from overseas investment over the years with a particularly strong inflow from the Far East. The worldwide recession has obviously curtailed much of this overseas investment and there will be a significant lag between a recovery in the worldwide economy and a return of overseas investors to the US.
The Obama government
There is no doubt that Barack Obama has had a significant impact upon the confidence of the US population during his short time in office. However, despite the headlines that the worst may be over this increased optimism has yet to transfer fully to the US economy and the US property market. Due to the nature of economics and the size of the US economy it can be compared to a large ship in the ocean. While the signs, and slow change in direction, are there for a potential recovery in consumer and business confidence it will take some time for the “ship” to change direction and about turn 180°.
Conclusion
As we have seen in the UK, the US government and the US media seem adamant that a recovery in the US economy is just around the corner. However, while the year started fairly well with the inauguration of Barak Obama and an increase in confidence across the US population, this has yet to feed into the economy or the US property market in particular.
The growth of so-called “tent cities” is of great concern to the authorities and has to some extent focused their minds on to the US property market as opposed to the wider US economy. While there will need to be some recovery in consumer confidence and the US economy before we see any significant recovery in the property market, there is no doubt that US real estate plays a significant part in the lives of many of the US population, businesses and corporate investors.
Recent downbeat statements from a flurry of US banks have refocused the minds of investors who appeared to be “getting carried away”. This worldwide recession and the US recession still have some way to go even if we are seeing a reduction in the rate of slowdown. Be in no doubt about it, this recession has hit the US property market very very hard and comparisons with the 1930s depression have been laid bare for all to see.