Q&A On Europe’s Housing Markets: Little Solid Ground

Given that there is no one single housing market in Europe, is there any general trend?

Jean-Michel Six: There are different fundamentals operating in each country’s market across Europe and even in the eurozone. The supply-demand situation across countries varies widely, from an excess of supply in some markets to an excess of demand in others, and that’s a very important structural factor. There are different fiscal regimes that aim to influence housing investment, as well as contrasting demographic trends across Europe. Lastly, the region has several slightly different monetary regimes, with monetary policy set by the European Central Bank for the eurozone, and by the Bank of England for the U.K., for example. And their monetary policy conduct somewhat varies, not so much in direction, but more in the instruments they use.

Sophie Tahiri: We do see a general historical trend, though. Beginning in the 1990s, for the first time we saw a synchronized and large rise in housing prices in most developed countries due to increasing income and easy access to credit. Since 2007, these countries have experienced a downward trend, triggered by the increase in interest rates and the financial and economic crisis that resulted in a weakening in household incomes. Consumer confidence, I found, has also been a key factor operating in the housing market. When there is a decline in confidence, prices are likely to follow.

Why haven’t European housing markets, with a few exceptions, started to stabilize yet, like the U.S. market?

Sophie Tahiri: That’s because the adjustment in Europe began later than in the U.S., except in the case of Ireland.

Jean-Michel Six: The fiscal retrenchment that started to take place in 2010 has been deeper in most European countries than in the U.S. It’s taking a greater toll on economic activity, specifically on employment. The rise in unemployment, which has been particularly dramatic on the periphery of the eurozone, in turn further dragged down housing markets at the time when they were already correcting, amplifying the correction.

If you look at the numbers, U.S. households have reduced leverage faster than in most European countries. But that was partly through a higher number of defaults on mortgage debt.

To read the full Q&A, click here.

Comparing the Cities

Now that we have three months in a row with all 20 cities showing monthly gains, people want to know how far we are from the all time highs and how soon we will set new record highs. Answers to either question differ from city to city.   Dallas and Denver are closest to their record high prices — these experienced less boom and less bust than the others, so their recovery hasn’t had as far to climb.  Moreover,  with only about a five percentage point difference from the record high, we could see either one set a new record high sometime in the next year.  The story is less encouraging for most of the others. Even Washington DC with its stable employment base and government-related economy is down more than 20% from its peak while the Sunbelt cities face deficits of 40% to 60%. The chart shows how the cities compare:

Source: S&P/Case-Shiller Home Price Indices, July 2012 data

The table provides more details across the 20 cities and the two composites. As shown by the composites, overall home prices are 30% below the preaks seen in 2006.  Without another housing boom like the one seen in the early 2000s, it will take a some time to get back to the peak levels.   From 1987 to 2000 the 10-city Composite rose at a 3.6% compound annual rate.  At that pace, it will take about seven and a half years to rise 30%. However, inflation and the economy over the 1987-2000 period were stronger so seven and a half years may be optimistic.

Source: S&P/Case-Shiller Home Price Indices, July 2012 data

CNBC Exclusive Interview with David Blitzer on U.S. Home Prices for July

David Blitzer, Managing Director and Chairman of the S&P Index Committee, discusses the latest data results for the S&P/Case-Shiller Home Price Indices on CNBC’S Squawk on the Street.

Home Prices Increase Again in July 2012 According to the S&P/Case-Shiller Home Price Indices

Data through July 2012, released today by S&P Dow Jones Indices for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, showed average home prices increased by 1.5% for the 10-City Composite and by 1.6% for the 20-City Composite in July versus June 2012.  For the third consecutive month, all 20 cities and both Composites recorded positive monthly changes. It would have been a fourth had prices not fallen by 0.6% in Detroit back in April.  To access click here:  S&P/Case-Shiller Home Price Indices – September 2012

For China’s Property Developers, Will Weaker Economic Conditions Obstruct Recovery Prospects?

Like many others, Chinese property developers are nervously waiting to see what’s in store for China’s weakening economy. And they probably have some cause to worry. A weak economic outlook typically dampens purchasing power and investment sentiment, potentially leading to easing property sales and weaker credit quality. Standard & Poor’s Ratings Services has highlighted the weakening Chinese economy as one of the main factors for keeping a negative outlook on the country’s property developers.

But Standard & Poor’s latest report card for the sector says the credit outlook for Chinese property developers is now less negative than it was six-to-12 months earlier. And it expects the number of negative rating actions to be lower in the next six months than in the past year. The improved outlook partly reflects higher property sales in the past few quarters, which have helped ease liquidity pressure for many developers. What’s more, the report says improving credit conditions will increase the availability of mortgage loans for first-time buyers and boost liquidity for project/construction loans.

Even so, Standard & Poor’s believes the prospects of strong growth for the sector are limited. Apart from the weak economic outlook, property sales may start to ease as pent-up demand is gradually absorbed. Moreover, administrative controls on speculation will continue to put a lid on investment demand and housing prices. According to the report, gross margins and EBITDA margins will be under pressure for the majority of rated developers due to sector-wide price-cutting and active promotions since 2011.

The report, titled “China Property Market Outlook Improves On Easing Liquidity Pressure,” can be found here.

Standard & Poor’s Approach To Rating North American REITs

Standard & Poor’s rates a universe of 70 equity real estate investment trust (REITs) generally concentrated in a variety of sectors. In this CreditMatters TV segment, Vice President of Client Business Management Steven Rosenzweig and Director Beth Campbell discuss our analytical framework for rating these commercial entities. Topics include business risk and financial risk analyses, criteria, how rationales support our rating decisions, and the overall ratings process.

Consumer credit default rates improve again in August

S&P/Experian Consumer Credit Default Indices. Sources: S&P Dow Jones Indices and Experian.

On September 18th S&P Dow Jones Indices and Experian released August 2012 data for the S&P/Experian Consumer Credit Default Indices, which measure consumer credit default rates. August data showed declines in the composite, first mortgage and second mortgage default rates. The national composite declined to 1.50% in August from July’s 1.51% rate, the first mortgage default rate fell from 1.41% to 1.40% and the second mortgage rate fell from 0.75% in July to 0.72% in August, the lowest in its eight year history

Four of the five loan types posted their lowest rates since the end of the 2007/2009 recession. Only auto loan rates increased marginally in August, but this was from July’s eight year historic low.

Los Angeles was the only city where the default rates fell in August; 1.60% is a post-recession low for that city. New York remained flat at its 1.49% post-recession low. Miami’s default rate rose from July’s post-recession low. Dallas’ and Chicago’s rates also rose in August.

As seen in the graph above, consumer default rates have fallen well below what was witnessed during the housing crisis, with the first mortgage and composite rates around those last seen in late 2006, and the second mortgage rate is at its eight-year historic low. a good sign for the housing recovery.

August Housing Starts Rebounded By 2.3% To 750,000 Units

U.S. housing starts rebounded by 2.3% to 750,000 annualized units in August.  It was under the 760,0000 starts expected by markets though near our forecast of 755,000 starts.  However, it comes after July’s 746,000 units started was downwardly revised to 733,000 units.  Single family starts rose by 5.5% over July, erasing the 4.5% drop seen in July.  Multi-family starts dropped by 4.9% after a 1.3% gain the month before.  Building permits dipped by 1.0% to a still high 803,000 in August.  While the report was a little weaker than consensus expectations, it will likely have only a modest impact on markets today, as investors take in more quantitative easing by the Bank of Japan.

Video: CNBC Interview with Robert Shiller

In this CNBC video clip, Professor Robert Shiller discusses the current state of the housing market.  Although housing prices have improved recently, Shiller states that it is too early to claim the housing market has recovered and believes this will become more apparent in the coming months.  Click here to learn more.

Home Builders’ Sentiment Index Up, Again

The National Association of Home Builders confidence index rose to 40 from 38 reaching its highest level since mid-2006 before the housing bust.  This topped most analysts’ forecasts as housing outpaces expectations.  Builders’ expectations for the future also climbed in the latest report.  The news comes amidst further reports of shrinking inventories of available houses and recent increases in home prices.  With recent gains in home prices, some analysts are beginning to look to rising housing wealth — peoples’ wealth in their homes — to contribute to consumer confidence and spending. (see recent story in San Francisco Chronicle)


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