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Monday, February 7, 2011

Fresh fears for US housing sector

The slump in America's construction industry was underlined by new figures on Wednesday, signalling that housing will remain a headwind for the world's biggest economy this year.

The number of new homes that workers began building last month declined by 4.3pc to an annual rate of 529,000, the lowest level since October 2009, figures from the Commerce Department showed.

A for sale sign is seen in front of a home March 23, 2009 in Miami, Florida. Fresh fears for US housing sectorA combination of low interest rates and the frenzy of the sub-prime mortgage market has saddled the US with 3m more houses than it needs, according to some estimates. So while a decline in the building of new homes is needed – 2010 was the second-weakest year since records began in 1959 – it is likely to mean more pain for the construction industry.
"The combination of persistenly weak demand and chronic excess supply means that homebuilding activity will remain painfully weak over the next few years," said Paul Dales, an economist at Capital Economics.
The housing sector has been identified by most analysts as the biggest threat to the US as the Federal Reserve and Congress unleash a blitz of stimulus measures to fire the recovery.
Average home prices are now 30pc below the peak reached in 2006, which has sunk about a quarter of all homeowners into negative equity, with California and Nevada particularly hard hit.
"You still have this nagging worry that if housing remains in this kind of uncomfortable equilibrium, it could drag down the consumer and the economy," said Cary Leahey, an analyst at Decision Economics.
The Fed remains concerned about the risk posed by the housing market, and has used it to justify its controversial decision to embark on a second round of quantitative easing. Eric Rosengren, the president of the Boston Fed, said last week that "if housing-related growth is not going to boost the recovery this time around, we may need policy – particularly monetary policy – to continue to play a stimulative role".
The picture for the housing market is further clouded by the controversy over whether banks are following correct procedures when they repossess homes. More than 1m homes were repossessed by lenders last year for the first time ever. Experts fear that a delay in further repossessions as banks are investigated will prevent the housing market finding a bottom and beginning a recovery.

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