Early signs suggest 2007 will be a year of US housing market recovery, mortgage finance giant Freddie Mac has concluded.

‘Sales of new and existing homes and mortgage purchase applications picked up towards the end of 2006, suggesting the trough may be near at hand’, said the firm in its latest market assessment.

The several different components of housing markets are apt to recover on their own distinct timetables. Housing market impact on the macro economy is likely to improve first, with any risks that its contraction could spark an economy wide recession fading fast. But housing activity is stabilising at levels well below recent years, and conditions will remain weak for homebuilders, realtors and brokers.

It may take some time for the ‘supply overhang’ to be absorbed although new home inventories have begun to decline, said Freddie Mac.

'The process of absorbing the excess housing supply has been under way for several months. New supply is low relative to demand, as single family starts in December were more than 30 per cent below their peak, while sales of new and existing homes were off 18 and 14 per cent, respectively. This reduction in new supply will ease the glut, although the process may take most of this year’.

Housing prices and credit quality are likely to lag other aspects of the recovery, according to the assessment. Excess inventories may continue to impact on house prices with sellers ‘gradually and reluctantly lowering their asking prices in response to the new reality of a buyers' market’.

The firm suggests mortgage repossession may increase. But ‘fortunately, these adjustments are taking place in an otherwise robust economy, with a vigorous job market and GDP growth outside of housing at a 4.75 per cent rate in the fourth quarter. Continuing gains in employment and incomes, and interest rates that are low by historical standards, will mute the negative impact on housing prices and credit performance as the recovery proceeds’.

Freddie Mac’s conclusions have been backed up by figures from the National Association of Realtors which says consumers are beginning to respond to more favourable housing market conditions although new home construction will be dampened until inventories decline further.

‘After reaching what appears to be the bottom in the fourth quarter of 2006, we expect existing-home sales to gradually rise all this year and well into 2008’, said NAR chief economist David Lereah. ‘New home sales should continue to slide, but we look for that sector to turn around later in the year. When you put it all together, home sales may appear weak in comparison with the record surge in 2005, but they will be sustained at historically high levels that are in line with long-term demand’.

Housing starts are likely to total 1.5m in 2007, down from 1.80m units in 2006, and then increase to 1.56m next year, said Lereah. ‘When new home demand begins to catch up with supply, builders will slowly increase construction – probably in the second half of this year’.
NAR expects interest on 30 year fixed rate mortgages to rise to 6.7 per cent by the second half of the year. ‘Mortgage interest rates remain favourable, and a gradual rise means potential buyers have some time to weigh purchase decisions. When existing-home supplies become more balanced between buyers and sellers this spring, we’ll see some modest price gains’.

The US estate agents’ body predicts average existing home prices will rise by 1.9 per cent to £115,500 in 2007, after rising only 1.1 per cent in 2006. The median new home price is expected to increase by 1.8 per cent to £127,500 in 2007, following a similar gain last year. Stronger gains are forecast for 2008, with existing home prices rising 3.2 per cent and new home prices increasing 3.4 per cent.

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