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House Price Stabilize a Year Ahead of Schedule: RBS

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The US economy and housing market in particular are recovering well ahead of the schedule previously anticipated by analysts and market observers, according to commentary by Royal Bank of Scotland (RBS) economists. RBS raised its near-term gross domestic product (GDP) forecasts "significantly" in response to positive economic data. Risks of a second economic dip are diminishing as post-Cash for Clunkers consumer spending remains stronger than analysts expected. Although the foreclosure inventory and the distressed mortgage pipeline cast a shadow on the US housing market, key indicators including new and existing home sales and prices suggest housing may be bouncing back. Foreclosures are working through the pipeline slowly, RBS says, because "the various mortgage modification programs initiated by the government have not done much to prevent foreclosures, but they have certainly delayed their timing, dragging out the adjustment process." The government program seen as having a lasting positive effect, however, is the $8,000 first-time homebuyer tax credit, which spurred households to move off the sidelines and into the market. Although the response has been less extreme than the Cash for Clunkers program in the automotive market, the tax credit is likely to have a similar effect upon its expiration. The stability of housing starts from June through September indicates a drastic drop-off in construction is unlikely, RBS said, since home construction typically takes around six months and so orders taken to coincide with the tax credit would have needed to start during summer. Steady starts through September indicates construction should not suffer much, regardless of whether the credit expires or is extended. Existing and new home sales show encouraging signs of bottoming in January and may even have risen by 25% from the low by September, according to RBS economists. At the same time, new and existing inventory have dropped. New home inventory remains lean although existing inventory is likely to be kept high as foreclosures continue to enter the market. House prices also appear to have bottomed in spring, although RBS warned seasonal winter weakness would not be unexpected and is unlikely to bring prices too far below the trough seen earlier in the year. The positive signs in price data mean house prices may have stabilized close to a year ahead of the schedule anticipated by economists, RBS said. "Certainly, we do not expect the sharp increases seen in recent months to be sustained for very long, but an end to the relentless plunge in home values would go a long way toward not only bringing balance to the housing market but also bolstering household attitudes toward spending," RBS economists wrote this week. Write to Diana Golobay.

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