Fair spell fails to warm US sales
David Watkins in New York
Slowdown has set in, despite a construction boom brought on by mild weather
January's unseasonable warm weather may have sparked a construction boom in the United States, but it failed to counter increasing evidence that the property market has passed its peak.
New home construction soared 14.5 per cent in January to the highest level in almost 33 years as builders took advantage of a record warm month to break ground on new projects. But economists saw the development as a blip in the market rather than the beginning of an upsurge.
With January housing starts rising to a seasonably adjusted rate of 2.3 million, the highest since March 1973, any optimism was countered by the fact that sales of existing and new homes continued to slow during the month.
New home sales fell to an adjusted annual rate of 1.233 million, which is 5 per cent below December's 1.298 million, according to figures from the United States Department of Commerce.
'That type of good weather usually supports these theories,' said Phillip Neuhart, economic analyst at financial company Wachovia. 'Yet the slowing of the market overwhelmed any weather effects.'
Sales of existing homes also continued to slide, slipping 2.8 per cent in January to an annual rate of 6.56 million, the slowest pace in nearly two years.
Meanwhile, the inventory of homes on the market climbed to its highest point since 1998, according to the National Association of Realtors.
With the overall impression the market is now in decline, what comes next? The new Federal Reserve chairman, Ben Bernanke, faces falling housing prices and the prospect of a steep economic downturn. But, like his predecessor Alan Greenspan, he is reluctant to restrict the growth of asset or property bubbles, instead cutting rates when prices fall.
Indeed, evidence suggests there is no need to intervene. US home prices rose 12.95 per cent on average last year, despite a string of mortgage rate rises.
According to Patrick Lawler, chief economist of the Office of Federal Housing Enterprise Oversight, 'house price appreciation during 2005 continued to hover at near-record levels. Mortgage rates climbed significantly during the second half of the year, but the effect of that increase on [home price rises] so far appears to be limited'.
The consensus is that, despite the slowdown in mortgage applications, Mr Bernanke will not be tempted to prick the bubble any time soon.
'We don't believe the Fed will cut rates,' Mr Neuhart said.
'Our forecast is for it to be raised two times this year, bringing the rate to 5 per cent and then to hold for the rest of the year. Right now there's no reason for the Fed to cut because the economy seems to be going at a trend level with inflationary pressures.'
Mr Neuhart added that this observation depended on what data was provided by the end of the first four months of this year.
In the meantime, most recognise the market will continue to slow, albeit with some fluctuation.
'We expect housing starts to be in the area of 1.9 million compared with last year's 2.08 million,' Mr Neuhart said. 'In the next few months we could see surprising numbers going up and down. I don't think there will be a clean line of deceleration.'