US house price falls point to a weaker economy in 2011

US housing has not emerged from its long recession, and things are likely to get considerably worse before they get any better. That is the conclusion to be drawn from yesterday’s S&P/Case-Shiller index that showed annual property values fell 0.8 per cent from October 2009, the biggest year-over-year decline since December 2009.

This was below the worst expected by forecasters. Across 20 top US cities the average house price decline over three years is 24.7 per cent, ranging from 51.6 per cent in Las Vegas to 6.6 per cent in oil-rich Dallas.

Clear down trend

This is not an isolated data series. Housing permits fell in November to their third-lowest level on record, while starts were only up for the first time in three months. The US housing market must now be closer to a bottom than at the start of the downturn. But how much lower will it go?

The economic indicators are mixed. The Conference Board’s confidence index yesterday unexpectedly fell to 52.5, lower than the most pessimistic forecasts. But holiday season spending was up 5.5 per cent, the best performance since 2005. S&P short positions are very low, indicating investor optimism.

The achilles heel for housing and the rest of the US economy is interest rates. Everybody seems entranced by the Fed promise to keep interest rates low, not actually noticing that rates have been moving up and not down since the start of the QE2 program that is supposed to keep them down.

Higher interest rates

But the Fed is only a part of the story for interest rate levels. The bond market is where mortgage rates are really set. Treasuries fell 2.7 per cent in December, the most since January 2009, pushing bond yields up and this is what determines the cost of borrowing to buy a US home.

Higher borrowing costs in the New Year do not bode well for a US housing recovery, and without a housing recovery it is hard to see anything more than an anaemic recovery for the general economy. Higher borrowing costs will also inevitably impact on stock prices, something short positions suggest investors are not even considering.

It was the fall in US house prices in 2006 than started this long down phase for the US economy and it will not end until housing begins to recover, and that will not happen until this double-dip is played out.