US housing recovery falters

The past fortnight's economic reports have cast renewed doubts about the recovery of the housing sector in the United States.

Last Tuesday, the National Association of Realtors reported that sales of existing US homes unexpectedly fell in May despite a government tax credit to encourage home purchase, decreasing by 2.2 percent to a 5.66 million annual rate.

The number of existing homes on the market fell 3.4 percent to 3.89 million. However, at the current sales pace, this still represented 8.3 months of sales.

On Wednesday, the Commerce Department reported that sales of new homes fell a record 32.7 percent in May to an annual rate of 300,000 units, the lowest level since the series started in 1963, as the expiration of the tax credit made its first impact on this indicator.

The number of new homes for sale dipped to 213,000 units, the lowest since November 1970, but the drop in sales means that this represented 8.5 months of sales, the highest in nearly a year.

The previous week, the Commerce Department had reported that housing starts fell 10 percent in May, the biggest decline since March 2009. The drop in the supply of homes on the market in May was a good sign for housing construction in the long term. However, the home inventory remains at a relatively high level when compared to sales, so it may be difficult for housing starts to regain much momentum in the near future.

The weak housing sector could weigh on an economy that turned out to be weaker than previously expected in the first quarter.

Last Friday, the Commerce Department reported that real gross domestic product growth in the first quarter grew at an annualised rate of 2.7 percent, less than its previous estimate of 3.0 percent. Consumer spending turned out to be weaker than previously estimated, growing at a 3 percent rate rather than the 3.5 percent rate reported earlier.

Of course, it was housing that pulled the rest of the economy into recession in 2007 and although the overall economy has made a partial but substantial recovery, housing itself has lagged far behind despite the efforts to prop it up.

For example, when you compare the trend for housing starts and new home sales with industrial production, it is obvious that the first two have failed to keep pace with the recovery in the latter. Industrial production is clearly in recovery and although the industrial production index is still some way below its peak in 2007, it is also clearly off its trough in 2009, something that cannot be said for housing.

Manufacturing in particular looks likely to continue to recover based on last week's Commerce Department report on durable goods orders. Although total durable goods orders fell 1.1 percent in May, excluding the volatile transportation component, durable goods orders were up 0.9 percent, indicating that the underlying trend probably remains positive.

In contrast, the past fortnight's reports show that the battered and bruised housing sector is still struggling to get off the floor.