After 6 long years, the US housing market bottoms


Article Highlights

  • Six long years later, the US housing market is finally bottoming.

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  • Delinquencies on US mortgage loans, while still at high levels, have significantly decreased.

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  • The RE/MAX National Housing Report suggests that 2012 has become the year of the housing recovery for the US.

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Six years ago, in September, 2006, the IUHF World Congress in Vancouver, Canada, began with a discussion of whether we were in a housing bubble. As reported by Adrian Coles, IUHF Secretary General at the time (and now Executive Committee member):

“The keynote opening session of the [2006] Congress was on the question of whether recent rapid increases in house prices represented a housing bubble which was about to burst with calamitous consequences…or
whether current house price levels are a natural economic reaction to long-term expectations of low interest rates.”

With the advantage of hindsight, of course we know the right answer. A number of countries were celebrating the first decade of the 21st century with house price bubbles. With hindsight, we also know that U.S. house prices had reached their bubble peak in the second quarter of 2006, just before the Congress opened. Then came the calamitous consequences of the bust, accompanied by a constant new question: How long can this disastrous housing bust last?

Six long years later, the U.S. housing market is finally bottoming. Interestingly, six years is the international, historical average duration of the housing bust which inevitably follows a mortgage credit and house price bubble, as calculated by Carmen Reinhart and Kenneth Rogoff in their book, This Time is Different (2009).

As shown in Chart 1, average U.S. house prices, after falling about 34%, are moving generally sideways, and are slightly above their level of a year ago. As also shown on the chart, they have fallen below their trend line, and have returned to the levels of 2003. One 2012 survey found house prices rising in about 40% of the 384 U.S. metropolitan areas it covered and observed that “It is now cheaper to buy than to rent in many U.S. markets.” In recent months, the number of house sales has increased and inventory-to-sales ratios, price-to-rent ratios, and price-to-income ratios have all improved.

The extent of the house price correction and the probability of having reached a bottom are even more evident if we measure house prices in real, or inflation-adjusted terms, as shown in Chart 2. In inflation-adjusted terms, U.S. house prices have fallen not 34%, but 41% and are all the way back to the level of 1999, thirteen years ago. In other words, looked at in inflation adjusted terms, the entire house price bubble has been reversed.

Consistent with these thoughts, a July, 2012 Deutsche Bank study, “Global Home Prices,” considers the relationships of house prices-to-rents and house prices-to-household income. It concludes that U.S. house prices have become undervalued on fundamentals by 10%. Indeed, we would expect fundamental undervaluation, as well as having fallen below the trend line, at a market bottom.

Delinquencies on U.S. mortgage loans, while still at high levels, have significantly decreased. They are bad, but much less bad than before. Chart 3 shows the percentage of prime mortgage loans 90 days or more delinquent, according to the Mortgage Bankers Association quarterly survey.

Similarly with subprime mortgage delinquencies: still bad, but less bad, as shown in Chart 4.

The RE/MAX National Housing Report suggests that “2012 has become the year of the housing recovery” for the U.S. Trying to put all the factors together, it seems to me this is a little optimistic. We can say that 2012 seems to be the year the U.S. housing market has bottomed at long last. It seems likely that 2013 will be the year a cyclical recovery gets under way. We can discuss whether this is proving correct at the IUHF World Congress in Vienna in June, 2013!

Also at the Vienna World Congress, we should consider a quite fascinating development in North America. Take a look at the vivid contrast between Canadian and U.S. house prices, as shown in Chart 5.

Relative to the year 2000, Canadian house prices have moved far above the levels reached in the U.S. at the top of its bubble. After an eight year run-up and then a brief correction in 2009, Canada’s house prices have been rapidly inflating for three more years, giving rise to anxiety about whether this is yet another house price mortgage credit bubble. So the key question posed at the 2006 World Congress is again being debated in Canada.

Alex J. Pollock can be reached at

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About the Author


Alex J.
  • Alex J. Pollock is a resident fellow at the American Enterprise Institute (AEI), where he studies and writes about housing finance; government-sponsored enterprises, including Fannie Mae, Freddie Mac, and the Federal Home Loan Banks; retirement finance; and banking and central banks. He also works on corporate governance and accounting standards issues.

    Pollock has had a 35-year career in banking and was president and CEO of the Federal Home Loan Bank of Chicago for more than 12 years immediately before joining AEI. A prolific writer, he has written numerous articles on financial systems and is the author of the book “Boom and Bust: Financial Cycles and Human Prosperity” (AEI Press, 2011). He has also created a one-page mortgage form to help borrowers understand their mortgage obligations.

    The lead director of CME Group, Pollock is also a director of the Great Lakes Higher Education Corporation and the chairman of the board of the Great Books Foundation. He is a past president of the International Union for Housing Finance.

    He has an M.P.A. in international relations from Princeton University, an M.A. in philosophy from the University of Chicago, and a B.A. from Williams College.

  • Phone: 202.862.7190
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    Phone: (202) 419-5212

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