The latest news to come out of the US housing market is that new home sale volumes have slumped to levels not seen since 1963 and established home sales have fallen to a decade low.  The new home sales figures are considered to be a leading indicator for established home sales market, suggesting the US housing market is likely to be in for further pain.

Despite the fall away in volumes, the plunge in housing prices appears to have abated.  According to Core Logic’s House Price Index (www.corelogic.com) house prices have stabilized about 24% lower than where the peaked back in September 2005.  Core Logic’s forecasts suggest that the US housing market is likely to continue to be held back by distressed sales and predicts further but modest falls in home values going forward:

“Home price volatility and collateral risk remain very high. The stabilization phase and policy intervention since the spring of 2009 has run its course. Prices are expected to further moderately decline as the economy remains weak through the fall” said Mark Fleming, chief economist for CoreLogic.

The weakness in the US housing market comes at a time when a variety of key indicators remain in ill health:

• National unemployment remains at 9.5% (compared to Australia’s 5.3%)
• Mortgages more than 90 days in arrears are estimated to be at almost 10% of all loans.  The situation is even worse in states like Nevada, California and Florida where the 90 days arrears rate is estimated to be around 20% of all loans (the percentage of Australian home loans more than 90 days in arrears is estimated at 0.6% of all housing loans)
• Housing supply is estimated to be at around 12 months (double the estimate for Australia which has about 6.0 months of supply currently advertised for sale)
• The 30 year fixed mortgage rate has fallen to 4.5% (the large majority of US home loans are locked in for 30 years) and is expected to fall a further 50 basis points by the end of the year.  Note that mortgage rates aren’t pegged to the cash rate like they are in Australia.  That fact, plus the fact that home loans are largely at ‘fixed’ rates makes it difficult for borrowers to take advantage of the low interest rate environment.
• Core Logic research indicates that more than 11.3 million, or 24 percent, of all residential properties with mortgages had negative equity at the end of the fourth quarter of 2009 (a borrower is in negative equity if they owe more on the mortgage than the home is worth).  Core Logic also suggests that the typical US home owner with negative equity won’t move into positive equity until around 2015/16.  In worse hit markets a move back to positive equity isn’t likely until around 2020.

A few points to take from the short summary above are that Australia’s housing market is radically different to that of the US.  We have a housing shortfall, strong population growth, a robust financial system, low unemployment, improving economic conditions and a residential market that appears to be moderating in growth in a controlled fashion.   Importantly, mortgage arrears have not moved upwards suggesting that Australian borrowers are coping with the increased level of interest rates quite reasonably.

Secondly, it looks like the US market has a long way to go before a recovery can be celebrated.  While home prices appear to have stabilized, volumes remain extremely low and continue to show further falls.  The housing market is arguably going to present the largest hurdle for a broad based US economic recovery and an improvement in conditions doesn’t seem to be on the drawing board any time soon.

Consumer sentiment data published by Westpac and the Melbourne Institute this month shows there has been a bounce back in confidence amongst Australians during July.  The Index gained 11.1% in July and has remained above 100 points (an index value of 100 is where optimists and pessimist are equally weighted) since June last year.  Since interest rates started rising in October last year the Index had been trending downwards, however the July result brings the confidence measure back well above the five year average.

The latest figures show that Australians remain reasonably optimistic about Australian economic prospects.  A stabilisation in interest rates, strong jobs figures and some improvement in global financial markets are likely to be the main drivers behind the improvement.

A byproduct of the Consumer Sentiment Index is the ‘Time to Buy a Dwelling Index’ which has also seen a sharp improvement during July.  This Index recorded a 15.6% jump in July suggesting that consumers are viewing a residential property purchase much more positively than they were last month.

Even though there has been a surge in the Time to Buy a Dwelling Index, Australian’s remain much less optimistic about the real estate market than they were at the same time last year.  The index is down 24% between July 2009 and July 2010 highlighting the slowdown in market conditions that has been seen over the second quarter of 2010 (the RP Data-Rismark Hedonic Home Value Index showed home value growth has virtually stalled in April and May – see release here).

Looking forward, the consumer mind set with regards to residential property is likely to be largely influenced by the perceived direction of interest rates.  The consensus seems to be that interest rates are likely to remain flat for the foreseeable future; however the big test will of course be CPI results which are released on July 28^th.  A stable rate environment is likely to see more owner occupiers viewing the residential market in a positive light.

Despite this, it is unlikely that we will see consumers viewing the residential property market with the same exuberance as last year, especially considering that value growth is now slowing and the historically low interest rates seen through most of 2009 are well and truly behind us.

Australia’s dramatic rate of population growth appears to have peaked, with the number of overseas migrants tanking in December.  Total population growth was down 18% in the December quarter of 2009 compared with December 2008.

Net overseas migrants are down significantly since peaking in the March quarter last year at 98,140.  In the December quarter of last year net migration was just 49,170 – about fifty percent lower than peak overseas migration less than a year ago.

The slowdown in overseas migration is likely to be due to a number of factors.  During the early part of last year, Australia was one of the few bright economies in an otherwise dim global economic climate.  Fewer residents were leaving Australian shores thanks to the rosier economic conditions.  With some improvement in global economic conditions, departures from Australia have picked up.  Based on ABS arrivals and departures data, permanent overseas departures were about 10 percent higher in April this year than April last year.  The increase in departures was compounded by a slump of equal magnitude in overseas arrival numbers.

Even though we have seen a slowdown in net migration levels, the number of overseas migrations remains about 15 percent above the decade average.

At the state level we are seeing some interesting trends.  Interstate migration into Queensland continues to slow; at the same time, in a virtual mirror image, the number of interstate migrants flowing out of New South Wales is continuing to moderate.  This dual trend has been evident since late 2001 when the housing price gap started to narrow.  Back in 2001 Brisbane house prices were about 50 percent lower than those of Sydney.  The gap has since narrowed to about 20% (and was as low as 12% in early 2008).

Despite the improvements in the intestate outflow of residents, New South Wales remains as the state bleeding the largest number of residents to other states and territories.  Over the last year about 13,800 more residents left New South Wales than arrived from other states or territories.  The other states that are experiencing a net outflow of residents to other states are South Australia (-3,317 residents), the Australian Capital Territory (-599 residents) and Tasmania (-50 residents).

The fastest growing populations remain in the resource rich regions.  Western Australia’s population increased by 2.7 percent over the year, Queensland’s population increased by 2.4 percent and the population in the Northern Territory increased by 2.2 percent. As the resources sector continues to bounce back it is a safe bet that these states will continue to see the fastest rates of population growth.