US set for 5% growth in residential property market in 2013 says RICS

There have been noteworthy improvements in the housing market in the United States in 2012, with homebuilding, prices and sales trending upwards, according to the Royal Institution of Chartered Surveyors.

It is predicting a rise in home values of 5% in 2013 but warns that downside risks remain, such as the shadow inventory and more generally the strength of the economic recovery.

‘A robust and sustainable US economic recovery hinges on the health of the housing market, which seems to be on the mend going into 2013, with some solid gains in prices and transactions of late,’ it says.

However, significant headwinds still persist such as the large amount of homes being held off market and weak labour conditions, it adds.

Home values are still almost a third below their pre-recession peak, according the S&P/Case-Shiller house price index, which measures repeat home sales in the 20 largest metropolitan areas. Indeed, the dramatic fall in prices after 2008 has seen nearly $7 trillion wiped of households’ balance sheet.

This has led to the number of households whose mortgage is greater in value then their home, known as being underwater, to stand at 10.8 million according to Corelogic. Home sales, existing and new, remain 30% and 70% below their pre-recession peaks respectively.

‘Clearly, the market has yet to recover fully but there have been indications that it is on the right path. Home building is sitting at its highest level since the middle of 2008. Similarly, housing permits, which are a good lead indicator of starts, are also at a multi year high, pointing to the current strength in residential construction continuing in the short term,’ says the RICS market report.

It also points out that home builders are more optimistic, new home sales have risen 17% over the past year, and existing home sales have also been trending upwards heading into 2013.
‘In the short term at least, continued gains can be expected according to the pending home sales index, which leads existing home sales by two to three months. Another positive is the composition of home sales, with distressed sales now accounting for only 24% of total sales, as compared to above 30% a year ago,’ the report says.

Home prices recorded 3% annual growth in the 12 months till October according to the S&P/Case-Shiller 20 city composite index. ‘This is a significant development, as this is the first annual gain post recession. One further point is that during the boom, the market was much more cohesive in the sense of price movements, will all cities recording rising home values. In contrast, the present recovery is seeing the national market becoming fragmented, with some cities seeing rising prices whilst others continue to see declines,’ the report explains.

The recovery is fragmented. Phoenix, which was one of the hardest hit cities in terms of price falls, has recorded 20% gains, and cities that saw less extreme price declines such as New York and Chicago are, as yet, struggling to record any price growth.

‘We are cautiously optimistic about the state of the housing market. Indeed, encouraging signs are emerging such as rising home values, construction activity and sales. Demand is being supported by sustained, albeit modest, job growth and record affordability, and reflects increasing consumer confidence and household spending,’ the report says.

‘Also, once the fiscal cliff is dealt with, confidence should improve, and hopefully release some pent up demand.  However downside risks remain, such has the number of properties being held off the market and the foreclosure pipeline that could bring hundreds of thousands of distressed properties onto the market,’ it points out.

‘Additionally, weak credit growth and the fragile labour market remain the largest obstacles to a sustainable recovery. Although the housing market has ploughed along in spite of the weak macro environment, this can only be sustained for so long without support from stronger job growth and improved lending conditions,’ it adds.

Finally, a housing market collapse of the magnitude witnessed by the US will take many years to recoup fully all the losses. Indeed, it may well be that prices and activity levels will remain below their pre-recession peaks for sometime ahead,’ it concludes.