December 21, 2009 / 5:58 AM / 11 years ago

GLOBAL ECONOMY WEEKAHEAD -Testing US housing market's foundation

WASHINGTON (Reuters) - The once high-flying U.S. housing market, the primary culprit behind the global recession, is beginning to look like a bargain again. Just don’t look too closely at the cracks in the foundation.

Data coming this week will likely underscore how far home sales have recovered from the depths of the housing bust that sent global financial markets into a tailspin beginning in 2007. Prices have fallen sharply from 2005 peaks, making home buying more affordable, and Washington has thrown in a sweetener in the form of an $8,000 home buyer’s tax credit.

Economists from Barclays Capital think Tuesday’s report on November sales of existing homes will show the biggest percentage gain since 1983. Another report on Wednesday will probably indicate new home sales edged up slightly last month.

But that does not mean all is well in the housing market.

“It’s not at all clear that the market is on a recovery path,” said James Diffley, a managing director at research group IHS Global Insight.

Stubbornly high unemployment may hinder a full recovery, and many economists are worried the housing market will falter once government supports begin to fade away early in 2010.

Global Insight’s study of U.S. house prices, released on Friday, illustrates the magnitude of the collapse in hard-hit property markets such as Florida and Nevada.

In Fort Lauderdale, Florida, Global Insight estimated house prices were 24 percent undervalued as of the third quarter 2009, based on its model that examines interest rates, household incomes, population, and historical price patterns.

Three years earlier, that area was deemed to be 44 percent overvalued.

Las Vegas is now undervalued by about 41 percent. In the third quarter of 2006, Global Insight deemed it overvalued by 33 percent.

Indeed, nationwide home prices are now roughly 10 percent undervalued, according to its research. No metropolitan area was considered extremely overvalued, while 52 earned that distinction at the peak of the housing bubble in 2005.

But even if good deals abound, there may not be enough buyers to quickly burn through the supply. Unemployment remains high, a major hurdle for would-be home buyers, and banks are demanding larger down payments and higher credit scores, which has shut some potential customers out of the market.

WILL RECOVERY LAST?

The United States was certainly not the only country with a boom-and-bust housing market. Spain and Britain had their share of real estate woes as well. Now China is taking steps to prevent its property market from overheating.

What makes the U.S. housing market unusual is the degree to which the government has supported housing through generous tax incentives and promoted home ownership as part of living the American Dream. Those supports were bolstered in the past two years as the housing market tumbled.

Between the home buyer’s tax credit, the Federal Reserve’s nearly $1.5 trillion in purchases of mortgage-related assets, and hundreds of billions of dollars in public support for mortgage finance companies Fannie Mae and Freddie Mac, the housing market has received a substantial lift.

Yet trouble spots lurk beneath those layers of support.

Although mortgage interest rates remain low — around 5 percent on a 30-year fixed-rate loan — some economists think they will edge higher once the Fed wraps up its asset-buying program early in 2010.

Many housing experts are concerned that hundreds of thousands of homes may be put up for sale in the coming months because of foreclosures.

Those factors, along with high unemployment and tight credit, could have a chilling effect on house sales and prices, which in turn would weigh heavily on the economic recovery.

The Fed appears to have similar misgivings. In its closely scrutinized statement following last week’s meeting, the Fed said the housing market had shown signs of improvement over recent months but maintained its commitment to keep short-term borrowing costs near zero for a while.

Those concerns were also on the minds of Wells Fargo economists, who said they remained cautious about the housing outlook even though recent readings on home building permits, construction and potential buyers have been encouraging.

“The calculus of home buying and finance has changed,” they wrote in a note to clients.

(Editing by Kenneth Barry)

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