Our update of the outlook for the US housing sector suggests that residential construction is likely to remain depressed for another year. The overhang of vacant homes remains elevated despite the historically low level at which residential construction has been running relative to GDP.

Adjustment of the housing overhang has been slowed by a depressed rate of new household formations. Our analysis suggests that household formations will remain subdued for another year or so in lagged response to the economic downturn and tightening of credit conditions. Prospects for 2012 look better however.

We also see home prices being depressed further over the year ahead by a high rate of foreclosures. The recent disruption to the foreclosure process could temporarily ease that pressure by slowing the rate of foreclosure sales, but it could also increase it by slowing the production of new mortgages (and therefore the demand for homes). Another 5% decline in home prices seems likely and would further depress household wealth and sentiment, retarding the expansion of consumer spending.

Eoin Treacy's view Given the continued weakness of US employment figures, tighter lending conditions, foreclosures and the "chain to title" issues revealed by the surge in repossessions, sentiment towards the US housing market continues to deteriorate. The New Single Family Homes Sold Index continues to deteriorate as buyers delay purchases. Over the 50 years displayed, this is by far the largest decline and the progression of lower highs will need to be broken to indicate a return to demand dominance.

Considering the overhang of supply, reluctance to buy for fear of prices falling further and the well publicised re-fixing of ARM mortgages due in the next couple of years, the authorities are doing everything they can to hold interest rates down and make sure that the affordability of houses remains close to a peak. The Freddie Mac National Mortgage 30yr rate remains in a consistent downtrend and is currently testing 4% in an unabashed attempt to make sure that those refixing their mortgages can do so on favourable terms.

The most recent value for the Case Shiller-10 Index is July 31st and a lot has happened in the meantime. However, prices show a loss of downward momentum and the most likely scenario based on this chart remains a lengthy convalescence.