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U.S. housing rebound feels its own kind of tapering

Is it possible that the U.S. housing recovery has already peaked and is heading in the wrong direction after prices became too frothy to be sustainable amid higher mortgage costs and a central bank hell-bent on tapering?

That's what the latest data appear to be signalling. If so, those who are counting on a strong housing market to power the U.S. recovery this year may be disappointed.

Consider the pending home sales index, which plunged 8.7 per cent in December from the previous month and 8.8 per cent from a year earlier, much worse than most analysts had projected. (The consensus was for a modest slippage of 0.3 per cent). This gauge of future sales of existing home, based on signed contracts rather closings, slid to its lowest point since October, 2011. It was the biggest one-month drop in nearly four years.

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This time, the weakness was reflected in every part of the country, leaving few slivers of optimism and making it somewhat ridiculous to blame extreme weather conditions for the precipitous decline. Yet that's exactly what the real estate lobby did.

"Unusually disruptive weather across large stretches of the country in December forced people indoors and prevented some buyers from looking at homes or making offers," said Lawrence Yun, chief economist with the U.S. National Association of Realtors, which compiles the index. Of course, that leaves unexplained why the western states, including temperate California, experienced a 16 per cent drop-off from a year ago.

To explain what happened there, look to other aspects of Mr. Yun's analysis: "Home prices rising faster than income is also giving pause to some potential buyers, while at the same time a lack of inventory means insufficient choice."

Mr. Yun observed that the brighter job picture, pent-up demand and lack of supply remain positives. But a surge in prices and higher mortgage rates will surely weigh heavily on the negative side. Mortgage rates are likely to continue to rise as the Federal Reserve reduces its monthly purchases of bonds and mortgage-backed securities. A still sizable backlog of foreclosed properties is another factor clouding the prognosis for a sector that remains a bellwether of the U.S. economy.

House prices in November were almost 24 per cent above their level in the spring of 2012, when record low mortgage rates and lack of supply began driving up prices. Several key markets posted their biggest nominal increases last year since the bubble days of 2006. When adjusted for inflation, prices, nationally, have returned to the levels of the early 2000s.

In such hot zones as stretches of the California coast, markets "have gotten out over their skis," one industry economist told the Wall Street Journal. Buyers have no trouble finding stuff to buy, provided they're willing to pay the prices demanded. Increasingly, their answer is: "No thanks."

All of this "supports our story that the best of the housing recovery is behind us," said Steven Ricchiuto, chief economist with Mizuho Securities USA.

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Barring a strong spring rebound and a much brighter employment picture, that sounds about right. Fed tapering comes at a price. Turmoil in emerging markets is one outcome. A weaker U.S. housing market is another.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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