U.S. Housing Recovery Enthusiasm Should be Measured

Stronger data suggests that the U.S. housing recovery is gaining momentum, but Fitch Ratings notes that, while the strength of some numbers is encouraging, enthusiasm should be measured, as we believe recovery will likely occur in fits and starts. Irregular trends in consumer confidence and still-high unemployment continue to restrain the recovery, and an unresolved U.S. fiscal cliff issue as well as ongoing financial woes in Europe certainly have not helped.

On Oct. 17, the Commerce Department reported that U.S. new home construction rose 15% in September to a seasonally adjusted annual rate of 872,000, surpassing estimates at about 770,000 and marking the strongest monthly showing in over four years. That data followed other recent promising reports of rising home prices and a reduction in foreclosures and was likely encouraged by record low mortgage rates. However, we note that new home construction numbers can be volatile as they fluctuate more frequently versus other indicators. Although starts have been stronger for several months, we are hesitant to suggest that a V-shaped housing recovery is forming.

Also, while progress is notable improvements are off a very low bottom. In a slowly growing economy with somewhat diminished distressed home sales competition, less competitive rental cost alternatives and new home inventories at historically low levels, single-family housing starts should improve about 19.0% in 2012, while new home sales increase approximately 19.5% and existing home sales grow 8.5%. Further moderate improvement is forecast for 2013.

We also expect average and median single-family new home prices should both improve 3.2% in 2012 and rise about 2.5% in 2013. And although home prices appear to have at least stabilized recently, home price appreciation will tend to be relatively narrowly focused and very sensitive to local economic, employment, and supply issues. Demand will continue to be affected by still widespread negative equity, challenging mortgage qualification standards, and excess supply due to foreclosures.

For a more detailed analysis of the housing market, please see the special report, "U.S. Homebuilding/Construction: The Chalk Line," published on Oct. 15 and available at www.fitchratings.com.

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