Signs are emerging that there will not be any upturn in the US housing sector before the first quarter of 2008.
The overhang of unsold houses, new and existing, continues to press down on prices, which economists and analysts now concede have not yet fallen to the same extent as they did in past slowdowns.
That means the recovery in demand for new homes will be pushed out into 2008, and that the upturn in demand for existing homes will be delayed as buyers wait for house prices to fall.
Economists say the downturn in the subprime mortgage sector of housing and the tightening of credit standards continues to be the major influence.
Two years ago an overhang of unsold existing homes, which is currently more than 8 months supply, would not have lasted; such was the level of demand.
Now that has changed with the collapse of the subprime mortgage market.
Analysts at Citibank in the US point out that trying to base a probable recovery by using the last big recession and slowdown in housing back in 1990, is not really applicable.
"Looking at the 1990 downturn suggests current levels of home inventories & existing home sales may also be incompatible with a stock rally, "they wrote to clients in the US late last week.
"While we are adjusting our target prices and ratings to reflect a considerably less optimistic near-term forecast, we stress the primary change in our stance is with respect to timing.
"While resales have declined about 17% from their 2005 peak, we believe the pace of existing home sales could still slow meaningfully in the months ahead.
"Over just the past year, the number of resales on the market has increased by nearly 1.5 million units. We do not believe that this entire increase reflects "excess inventory", since many of these units are not vacant; however there still appears to be nearly 18 months of excess, vacant units for sale on the market today.
"Given the unprecedented nature of this inventory build-up, and its obvious effect on pricing, we suspect that investors will likely need to see some credible evidence that a reduction in resale inventory is underway before a meaningful rally can take place in the homebuilding stocks.
"In our view, this will likely take at least another several months and possibly longer."
And that's the nub of the problem for the US housing sector.
What Citibank's analysts are saying is that the real overhang of unsold properties is growing and will do so for some time.
With US economic activity still sluggish to moderate at best, employment levels will now be a vital indicator.
That's why the June payroll figures, due out tonight in the US, will be watched to see if there is any sign of a loss of momentum in job creation.
So far that hasn't occurred, and while jobs growth remains strong in the US, the housing problem won't threaten the wider economy. If US unemployment starts rising, then watch for the impact in housing to be amplified in other sectors.
The possibility of further falls in US house prices was revealed earlier this week when the monthly index of pending home sales was released by the National Association of Realtors, the US real estate agent industry group.
The index threw up the possibility that existing home sales in the US are likely to fall over the rest of 2007.The index fell to its lowest level in nearly six years.
The Association said the index of pending home sales (which reflects homes under contract) sank to 97.7 in May from 101.2 in April. It was 13.3 per cent lower than in May of last year.
The Association created the index in 2001 to be a more forward-looking reading on home sales at the time of signing, instead of another home sales report which looks at figures at the time of 'closing'.
The Association set the index 100 at the start in 2001 and it promptly encountered 9/11, and fell. The May reading is the weakest since then.
So why is the index still falling, despite the housing slowdown being well advanced? Economists at the Association blame the tighter lending criteria from banks and others because of the subprime mortgage crisis.
This has eliminated hundreds of thousands of potential buyers who were being financed in 2005 and early 2006. As well, good credit-rated buyers are worried about the downturn and waiting to see if prices fall further.
The Association's report on existing home sales has been tracking the downturn for months, as has figures from the US Government.
The Association's existing sales report for May showed the slowest pace of home sales since June 2003, while the glut of homes on the market hit a 15-year high.
New and existing home prices have been falling for months, but not by enough to start clearing the backlog of existing houses, or tempt homebuilders into boosting low levels of activity.
Not after many homebuilders are still reporting losses and expect to do so for the next one to two quarters until they can rightsize their businesses with the level of demand.
There's still too much new homebuilding capacity for the present level of demand and there are no early signs of this changing, which would prompt a re-evaluation of homebuilding shares.
Now, if the inventory of unsold houses/units etc is much bigger than thought, and if future demand is constrained by the tighter lending limits and standards, what will happen to house prices, both new and used?
They won't rise, that's certain.
If home prices have only just started to fall and continue to fall; will that produce a sort of death spiral: more defaults on home loans feeding more foreclosures and a rising level of unsold dwellings.
And if mortgage defaults and foreclosures accelerate, this could have negative implications for the wider US econ
