United States: astonishing acceleration in house price recovery
The strongly above expectations recent pace of increase in house prices is reinforcing our scenario of a substantial growth pick-up in the second half of 2013 and in 2014.
There are several indices measuring US house prices. The most commented on is the S&P Case-Shiller index, but our favourite is the CoreLogic home price index. This is the one used by the Fed to estimate real estate wealth, and it has the advantage of being published earlier than the Case-Shiller index. April’s figures for the CoreLogic index were published yesterday, whereas April’s data for the Case-Shiller will not be available until 25 June.
Sharp house price increase in April
The CoreLogic index of house prices posted an astonishing m-o-m increase of 3.2% in April, following a +2.2% rise in March. Part of this rise is purely seasonal, though. However, even after making our own seasonal adjustments (the CoreLogic series is unadjusted), the increase remains surprisingly high: +1.6%, after +1.7% in March. Since the end of last year, house prices have risen by 6.4% (after seasonal adjustments), an astonishing annualised rate of 20.4%. On a y-o-y basis, the increase reached 12.1%, the highest since April 2006.
Still relatively cheap overall
Of course, it should be borne in mind that the ongoing recovery in house prices is starting from very low levels. According to the CoreLogic index, since bottoming in December 2011 house prices have gained a cumulative 15.6%. However, they would have to rise by a further 28% to top the peak observed in March 2006 (see chart below).
House prices likely to continue to rise
Nevertheless, the pace of the recovery in house prices is much stronger and widespread than what was usually expected a few months ago. And the revival is most likely to continue. Compared to the pace of sales, the number of homes currently for sale on the market remains fairly low (see first chart on first page), and this situation is unlikely to change rapidly. With house prices reaching progressively higher levels, building of new homes growing at double-digit pace, fewer owners in negative equity (which could boost supply) and a significant rebound in mortgage rates, the pace of increase in house prices will probably slow at some stage. However, overall, we remain quite optimistic. Household formation is accelerating, pent-up demand on that front is huge, credit standards are being relaxed progressively and households are starting to expect house prices to be higher in the future, which is probably a key element for a sustained rise.
Substantial wealth effect likely
This sharp rise in property prices is boosting household wealth (by a striking 1,400 billion dollars in 2012 and probably by even more than this in 2013). In the past, this factor has generally provided a significant boost to consumer spending, and we believe this will once again be the case. Findings from most empirical research studies suggest a one-dollar increase in the value of householders’ property assets filters through, after two years, into increased consumer spending of 5 to 10 cents. So, if we take our forecasts for household wealth, we would estimate that the upturn underway in the housing sector could add around 0.3 of a point to GDP growth in 2013 and probably more than double that in 2014.
In conclusion, the fact that the recent pace of increase in house prices was strongly above expectations is reinforcing our scenario of a substantial growth pick-up in H2 2013 and 2014.