Although the bailout of Fannie Mae and Freddie Mac helps, a U.S. housing turnaround, and therefore economic recovery, is likely still a year away, suggests BMO Capital Markets in a new report.

While U.S. GDP readings have outperformed gloomy expectations, BMO notes that the underlying fundamentals suggest that this recent strength isn’t going to last.

It reports that “American consumers have pulled back sharply, as necessities have dominated their spending. High food and gasoline prices reduced discretionary income, yet consumers refrained from spending much of their rebate cheques. American savings rates in Q2 jumped from 0.2% to 2.6%, the largest rise in six years. This is a traditional recession signal.”

Moreover, it notes that much of the decline in commodity prices reflects a slowdown in global demand. “To a lesser degree, it is also reflective of the strength in the U.S. dollar, which in itself was caused by the more recent economic deterioration outside the U.S.,” it says.

“With the slowdown in the global economy, the improvement in the U.S. trade deficit is likely going to slow. Even if GDP growth remains positive, however, persistent declines in employment and weakness in real sales might be enough for the NBER to declare a recession,” BMO warns.

Indeed, the U.S. jobless rate has climbed very rapidly to 5-year high of 6.1%, BMO points out.

Markets received some good news with the US Treasury’s decision to take over Fannie and Freddie, as mortgage rates have since fallen sharply. “This, along with meaningful house price declines, has improved affordability, which is a big issue for first-time homebuyers. For existing homeowners, however, the supply imbalance continues, making it difficult to sell, thus postponing most buying decisions,” it notes.

As a result, BMO suggests that refinancing activity “might bounce a bit”. But, it cautions, “consumer incomes are slowing and many creditworthy households and businesses will continue to have difficulty financing their operations and capital spending plans.”

Moreover, it reports that the risks are rising in the commercial real estate market as office vacancy rates are rising. “Office buildings have excess capacity, too many hotel rooms are vacant and shopping centre space is in excess supply. Many banks, particularly regional and community banks in the U.S., are exposed to these commercial real estate sectors,” it says.

“The key to a turnaround remains a recovery in U.S. housing, which will boost economic growth, reduce credit risk and thaw the credit freeze. The Treasury’s takeover action helps, but it still appears that a real turnaround is a 2009 story,” it concludes.

IE