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Family demographics point to a U.S. housing recovery


The gradual recovery of the U.S. housing market is thought to have stalled in May after reaching an 18-month high in April, but there are signs order is being restored to the moribund home-building industry.

What are the expectations?

Data set for release on Wednesday show U.S. housing starts are forecast at an annual rate of 648,000 in May, compared with 672,000 in April, according to a survey of economists by Bloomberg. The lower figure likely reflects a slowdown in the rush to buy ahead of the expiration of a U.S. government tax credit, economists say.

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But that rate is still less than half the rate of household formation - families being established - which is estimated at 1.5 million based on age groups, said Sal Guatieri, a senior economist with BMO Nesbitt Burns Inc.

"There is certainly some pent-up demand, but there was excess supply in the housing market," Mr. Guatieri said. For almost three years, the U.S. housing industry was constructing new homes at an annual rate of two million a year.

"House prices have largely stabilized and are rising in some areas of the country not hit hard by the housing crisis," Mr. Guatieri said. News reports also suggest that house construction is picking up even in those states hit hardest, such as Florida, Arizona and Nevada, because home builders can pick up land cheaply and profitably construct new homes, he said.

On Tuesday, Bank of America said that since January, 2008, it has provided more than 630,000 contract modifications designed to help financially distressed homeowners, according to Bloomberg. The bank said includes 70,000 conversions from trial to permanent contracts under the federal government's Home Affordable Modification Program - of which more than 16,000 were converted during the past month.

"It always seemed that it should be in the bank's own interest to do something other than to foreclose," said Bill Cheney, chief economist of MFC Global Investment Management, an arm of Manulife Financial Corp.

The rate of household formation in the United States along with its population growth and the willingness of people to relocate should make it easier to whittle down the excess supply of homes there than in Europe, which does not have the same rate of population growth or worker mobility, Mr. Cheney said.

The low rate of house construction is creating a buildup in demand, Mr. Cheney said. "When you think about the outlook, it all comes back to employment. Things could change faster than people expect." The demand for homes could soar once the job market improves, he said.

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But others are much less optimistic.

"The U.S. economy is steadily improving, but home builders remain exceedingly cautious as they continue to be undercut by a steady wave of distressed properties coming on the market," Meny Grauman, an economist with CIBC World Markets Inc., said in a report to clients. Inventories of new homes are at a five-month supply, the lowest level since 1970, but it's a market likely to be weighed down by yet-to-be foreclosed homes and bank-owned properties, he said.

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