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Perspectives on the US housing recovery

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Perspectives on the US housing recovery

The US housing recovery gathered pace in April, offering hope consumers’ appetite for real estate is rising in line with the rest of the economy. On Thursday the National Association of Realtors will report on pending home sales, giving the markets a complete picture of housing activity at the start of the second quarter.

The housing market appears to have gathered pace at the start of the second quarter, as building permits, groundbreaking and home sales all increased. Permits rose 8 percent to a seasonally adjusted annual rate of 1.08 million, and housing starts surged 13.5 percent to a 1.072 million pace. The sale of previously-owned homes edged up 1.3 percent to an annual rate of 4.65 million, rebounding from March’s 20-month low. The sale of new homes increased 6.4 percent to a rate of 433,000.

However, builder confidence continues to be subdued, reflecting weak sentiment about the pace of the housing recovery. Builder confidence plunged in February and has yet to recover, according to the National Association of Home Builders.

On Thursday the National Association of Realtors may show pending home sales increased 1 percent in April, following a gain of 3.4 percent the prior month. Pending home sales are a leading indicator of existing home sales.

Economists generally expect housing activity to pick up this year, as the labour market recovery continues to accelerate. Affordability has been one of the biggest challenges for potential homebuyers, who are likely dealing with subdued wage growth and an uncertain financial future. April figures suggested affordability issues were less problematic than previous months, as average home prices and mortgage rates declined.

Federal Reserve Chair Janet Yellen told lawmakers earlier this month the central bank was puzzled by the prolonged slowdown in housing activity, stroking fears the market for real estate could remain under pressure for some time. Housing activity has been subdued since last summer, around the time when mortgage rates began climbing.

Housing activity has “remained disappointing so far this year,” Yellen said in her testimony to the Joint Economic Committee on May 7.

Despite the concern, other Fed officials have expressed optimism about the housing recovery. Fed Bank of Philadelphia President Charles Plosser said last week he believes the housing market’s fundamentals are still sound, even though “sales have leveled off.”

Plosser pointed to rising home prices as a sign that it wasn’t just demand causing the problem.

House prices “are still rising, even over the last three months,” Plosser said last week. “[I]f prices are rising and sales are falling, or at least stabilized, that suggests that it’s not just weak demand that’s causing the problem. It could be restrictions in supply.”

At the current sales pace, the housing market has been unable to fully absorb the impact of higher mortgage rates. It is hoped faster wage growth and a stronger labour market can help spur purchasing activity at the consumer level.

The US labour market presents a mixed picture. Jobs growth has averaged 238,000 per month over the past three months, but participation rates have declined and wages continue to stagnate.

The Commerce Department will report on May nonfarm payrolls and earnings next Friday.

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