America's Housing Market: Signs of stabilisation should not obscure the big problems still ahead

The Economist:

HE IS hardly your typical distressed seller. Hugh Hefner recently sold his personal residence in Holmby Hills, California, next door to the Playboy mansion, to a 25-year-old entrepreneur for $18m--some 36% below the asking price. It will come as little solace to the ageing Lothario that the discount looked about right: house prices have fallen by one-third from their peak nationwide, and by much more than that in the worst-hit states, such as California, Florida and Nevada.

Although global financial sickness first erupted in American residential property, thanks to ludicrously lax subprime lending, policymakers have recently seemed more worried about asset classes to which the infection subsequently spread. When the Federal Reserve this week extended the life of a facility to support asset-backed securities, for instance, it was more out of concern for commercial property than for housing. Nevertheless, observers agree that America's economy--and all those banks still saddled with underperforming mortgages--will struggle to recover while house prices are still falling. The Obama administration's economic successes "will be for naught" if the housing free-fall continues much longer, says Mark Zandi of Moody's Economy.com.

Hence the excitement over some recent, albeit tentative, signs of stabilisation. The S&P/Case-Shiller index, which tracks home prices in 20 cities, ticked up slightly in May, its first gain in 34 months (see chart 1, left-hand side). New construction of single-family homes rose in July for the fifth straight month. Sales of existing homes are expected to show their fourth consecutive month of gains when latest numbers are released on August 21st (see chart 1, right-hand side). Toll Brothers, a big home-builder, just recorded its first gain in net orders (new orders minus cancellations) for four years. With homes now at their most affordable in living memory, relative to median income, "we've finally found a level where people want to do deals," says Pam Liebman, chief executive of Corcoran, an estate agency. The revival is largely at the lower end, which helps explain this week's $1.4-billion acquisition of Centex, a home-builder which specialises in cheaper houses, by Pulte Homes.