Question

Why is there a sluggish housing market in 2011?

Answer 1

In 2011, the housing market continued to weaken while the rate of weakening has declined by and wide. In the third quarter of 2011, the national housing price index recorded an annual decrease of 3.9 per cent, an improvement on the 5.8 per cent annual decline registered in the previous quarter. Nationally, in the first quarter of 2003 home prices are back to their level, which is close to the post-bubble low of 33 percent from the peak of 2006.

This downward trend in prices stemmed from excessive home inventories arising from a combination of past over-building and lack of demand during a weak economy. These inventories declined slowly in 2011, as the housing construction remained historically low throughout the year. Monthly single-family housing starts for the past year and a half have moved sideways at around 400,000, which is down significantly from the pre-recession peak of 1.8 million.

Housing was a major contributor to the financial crisis and subsequent recession, and its ongoing instability is leading to our anemic recovery. In the average recession, residential investment falls about eight percent after the start of the recession within about two quarters, and returns to pre-recession rates within five quarters. This recession saw a 35 per cent decline in residential investment and after 15 quarters it failed to recover. We may expect some change in the housing market as we reach 2012, but this slow pace of recovery does not imply a significant contribution to a broader economic recovery.