Is the housing crisis over?

Well maybe in America.

The infamous US housing crisis which spilled over into worldwide markets and was a major cause of the 2008 global financial crisis seems to finally be over. In the US at least.

Residential real estate prices released by S&P/Case Shiller this past week show that the US residential market has begun to recover after 5 years of negative growth.

The results show that in the 12 months to February 2013, US house prices rose by 9.3 per cent.

This index is based off the property values in 20 major cities. The largest gainers were Phoenix with 23 per cent growth, followed by San Francisco (19 per cent growth) and Las Vegas (18 per cent growth).

The two largest US cities, Los Angeles and New York, also both recorded price growth over the 12 month period. Los Angeles registered strong growth of 14 per cent, while New York recorded more moderate growth of 1.9 per cent.

Compared to peak levels

Despite this recent growth, home prices nationwide are still 29 per cent below their peak reached at the height of the housing bubble in July 2006. They are only back to where they were in the fall of 2003.

Some cities such as Dallas and Denver are almost back to where they were in July 2006. They are both within 5 per cent of peak levels. However, the likes of Los Angeles and New York are both over 25 per cent below peak levels.

Background to US housing crisis

Timeline

  • Prior to 1996 only wealthier people were able to get sub-prime mortgages. All this changed in 1996, when the US housing department set a goal for Fannie Mae and Freddie Mac that at least 42 per cent of the mortgages they purchase be issued to borrowers whose household income was below the median in their area.
  • This target was then increased to 50 per cent in 2000 and 52 per cent in 2005. This led to increased sub-prime lending, particularly to lower income groups.
  • During 2001, US interest rates were decreased from 6.0 per cent to less than 2.0 per cent in order to fuel consumer spending. Rates were then kept at this low level until 2005.

The points above fuelled increased mortgage lending and speculation which caused US house prices to increase by 57 per cent over the period between 2000 and 2006. Rates were then put up to just over 5.0 per cent in 2006 as the Fed suspected a property bubble was developing.

The US property market then began to contract in 2007, with house prices falling by 9.0 per cent during the year. A larger decline occurred a year later, in 2008, when US house prices fell by 18.6 per cent. This led to widespread panic in the market and a large number of home owners defaulted, resulting in a run on a number of investment banks that had bought and sold large volumes of ‘toxic debt’ instruments related to mortgages including credit default swaps.

The five largest US investment banks (with combined debts of US$4 trn) either went bankrupt (Lehman Brothers), were taken over by other companies (Bear Stearns and Merrill Lynch) or were bailed out by the US government (Goldman Sachs and Morgan Stanley) during 2008.

The US property market continued to decline in 2009 but by a more moderate 3.1 per cent. This was followed by a decline of 2.4 per cent in 2010 and a 4.1 per cent decline in 2011.

Recovery Begins

In 2012, US housing prices recovered by 6.9 per cent and by 9.0 per cent  in the 12 months to February 2013.

According to London based wealth consultancy, WealthInsight: “this increase bodes well for the future. However, confidence in the asset class has been heavily eroded and it will take more time to restore investor confidence”.

Andrew Amoils is a writer for WealthInsight

How Jim Murphy's mistake cost Labour - and helped make Ruth Davidson

Scottish Labour's former leader's great mistake was to run away from Labour's Scottish referendum, not on it.

The strange revival of Conservative Scotland? Another poll from north of the border, this time from the Times and YouGov, shows the Tories experiencing a revival in Scotland, up to 28 per cent of the vote, enough to net seven extra seats from the SNP.

Adding to the Nationalists’ misery, according to the same poll, they would lose East Dunbartonshire to the Liberal Democrats, reducing their strength in the Commons to a still-formidable 47 seats.

It could be worse than the polls suggest, however. In the elections to the Scottish Parliament last year, parties which backed a No vote in the referendum did better in the first-past-the-post seats than the polls would have suggested – thanks to tactical voting by No voters, who backed whichever party had the best chance of beating the SNP.

The strategic insight of Ruth Davidson, the Conservative leader in Scotland, was to to recast her party as the loudest defender of the Union between Scotland and the rest of the United Kingdom. She has absorbed large chunks of that vote from the Liberal Democrats and Labour, but, paradoxically, at the Holyrood elections at least, the “Unionist coalition” she assembled helped those parties even though it cost the vote share.

The big thing to watch is not just where the parties of the Union make gains, but where they successfully form strong second-places against whoever the strongest pro-Union party is.

Davidson’s popularity and eye for a good photo opportunity – which came first is an interesting question – mean that the natural benefactor in most places will likely be the Tories.

But it could have been very different. The first politician to hit successfully upon the “last defender of the Union” routine was Ian Murray, the last Labour MP in Scotland, who squeezed both the  Liberal Democrat and Conservative vote in his seat of Edinburgh South.

His then-leader in Scotland, Jim Murphy, had a different idea. He fought the election in 2015 to the SNP’s left, with the slogan of “Whether you’re Yes, or No, the Tories have got to go”.  There were a couple of problems with that approach, as one  former staffer put it: “Firstly, the SNP weren’t going to put the Tories in, and everyone knew it. Secondly, no-one but us wanted to move on [from the referendum]”.

Then again under different leadership, this time under Kezia Dugdale, Scottish Labour once again fought a campaign explicitly to the left of the SNP, promising to increase taxation to blunt cuts devolved from Westminster, and an agnostic position on the referendum. Dugdale said she’d be open to voting to leave the United Kingdom if Britain left the European Union. Senior Scottish Labour figures flirted with the idea that the party might be neutral in a forthcoming election. Once again, the party tried to move on – but no-one else wanted to move on.

How different things might be if instead of running away from their referendum campaign, Jim Murphy had run towards it in 2015. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.

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