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Plunging U.S. home prices close to finding a floor

Falling U.S. house prices are close to bottoming out.


U.S. home prices near bottom

U.S. home prices have been declining for the past five years and foreclosure activity has hit record levels. But there are signs that the bottom may at last be at hand.

This could be the year that the decline in U.S. home prices finally comes to an end, says Paul Dales, senior U.S. economist at Capital Economics.

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He cautions, though, that this does not mean prices are headed for a steady rise.

"Tough credit conditions and rising foreclosures will prevent significant and sustained price gains until 2014," he writes in a recent report.

He suggests that prices fell about 3.5 per cent in 2011. But, as 2012 gets underway, they are close to finding a floor.

Progress has been made in reducing the supply overhang, and banks are a little more willing to lend. Towards the end of last year, for example, lenders were willing to extend a loan worth 80 per cent of the purchase price of a home, up from about 70 per cent in 2010, he notes.

The outlook for 2012: tepid

It looks like we're in for another year of slow economic growth.

Global economic activity is likely to moderate again this year, with worldwide output growth expected to increase by only 3.6 per cent – 1.5 percentage points below the pace established in the first full year of recovery in 2010, according to the latest update by the Bank of Nova Scotia.

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"This lacklustre performance reflects the compounding effect of a number of factors, most notably increasing fiscal belt-tightening in many advanced nations, prior credit restraint in some key developing countries, and the cascading effect on international trade, credit, and financial conditions associated with the euro zone's lingering sovereign debt crisis," says the report.

The euro zone has already tilted into recession, the report maintains, while the pace of activity in Canada and the U.S. is expected to average less than 2 per cent in the coming year.

Output growth for the powerhouse Chinese economy is likely to slip under 9 per cent this year, as international trade slows and the country's hot real estate market cools down, the report notes.

"The latest economic indicators are consistent with positive, yet moderate growth, as relatively solid domestic demand – consumer spending, housing and business investment – is tempered by weak global export conditions."

Investors flee U.S. equity funds

Those looking for signs that the economic turnaround is taking hold in the United States should keep an eye on a key indicator for 2012: retail purchasing of equities.

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Equity mutual funds in the U.S. posted their eighth consecutive month of outflows in December, the worst sequence on record, according to fresh data from the Investment Company Institute.

Funds that invest primarily in U.S. equities saw outflows of $140-billion (U.S.) over this eight-month period, an amount exceeding that recorded at the worst of the 2008-09 credit crisis, National Bank Financial's Stéfane Marion says in a research note.

The result is a ratio of stock-to-bond holdings in mutual funds that is at its lowest point since 1994, although investors still hold more equities than bonds, he writes.

But Mr. Marion believes investors will return to equities this year.

"At this juncture, we believe that improving economic data in the U.S., combined with a decent fourth-quarter 2011 earnings season, will provide the impetus that will stop the bleeding in U.S. equity mutual funds," he says.

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About the Author
Quebec Business Correspondent

Bertrand has been covering Quebec business and finance since 2000. Before joining The Globe and Mail in 2000, he was the Toronto-based national business correspondent for Southam News. He has a B.A. from McGill University and a Bachelor of Applied Arts from Ryerson. More

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