US House Prices: No Real Recovery in Sight

House prices in the United States are about to end a five-year-long decline but a meaningful recovery is a number of years away owing to a structural deficit in demand, according to analysts.

A persistent deficit in demand means that even when house prices finally find a floor, which could happen next year, they won't rebound rapidly. Sustained price gains are unlikely until 2014 at the earliest, Capital Economics analyst Paul Dales said in a note.

House prices in the United States rose 0.9 percent in July, when compared to June, according to the S&P/Case-Shiller 20-city home price index. The improvement in prices was due to seasonal factors and initial signs of rise in housing demand.

However, the year-on-year decline in home prices was pegged at 4.1 percent, reflecting weak consumer confidence and sputtering economic recovery.

While we have now seen four consecutive months of generally increasing prices, we do know that we are still far from a sustained recovery,” Chairman of the Index Committee at S&P Indices, David Blitzer, said.

According to Dales, the demand deficit will linger for years, afflicting a house price recovery. The weaker economic backdrop has already hit housing activity, with demand from cash buyers and investors falling particularly sharply, Dales wrote. He says that even a decent economic recovery may not trigger a surge in home sales.

He estimates that with GDP set to rise by just 1.5 percent next year and 2 percent in 2013, the economy will not generate a decent housing recovery.

We now expect GDP growth of 1.7% in 2011 and just 1.5% in 2012, a slight downward revision from our previous forecasts of 2% in both years. We still expect growth to be a little stronger in 2013, but only marginally at 2%, he said.

Dales says that there is little the policy makers can do to boost the economy.

The Fed has a few limited options at its disposal, but nothing that we think would make any significant difference to the economic outlook. The unemployment rate is likely to remain close to 9% and real disposable income growth will remain low, he added.

In this context, he says that only the resolution of structural problems created by the recession and financial crisis can contribute substantially to the housing market recovery.