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To paraphrase Bill Clinton, it’s the US housing market, stupid, writes the FT’s John Authers in Tuesday’s Short View column.
With Europe on holiday, US traders behaved on Monday as if they too were celebrating. Apart from dubious optimism that a line had been drawn under the credit crisis, this festive mood was driven by US housing data.

Existing home sales rose last month by 2.9 per cent - the strongest rise since February last year. The backlog of unsold inventory also declined and would now be expected to take 9.6 months to shift - down from more than 10 months. Analysts had been braced for lower sales.

Now for some cruel context. Unsold inventory remains more than double its level for most of the first half of this decade; sales are almost a third lower than at their peak; and sales are only recovering because sellers are giving up and taking vastly less than they once expected.

According to the National Association of Realtors, the median US house price is now $195,000, a record 8.2 per cent down from its level a year ago.

The news was great for homebuilding stocks, with the S&P 500 homebuilders’ index gaining more than 10 per cent. It has now regained more than 70 per cent from its low, set in January, and appears to have set a bottom, even if it is still 64 per cent below its peak.

The problem is that it all may be too late. The level of the S&P 500 tends to follow activity in the housing market with a lag of 20 months. If that were to continue, it could fall 60 per cent by the end of next year.

Also, the fall in prices will leave more Americans in negative equity, which should increase mortgage defaults. Drastic price cuts to clear inventory could thus be dreadful news for financial institutions hoping to pare back losses on mortgage-backed securities.

In the long run, house prices matter. And in the long run, the latest numbers, though better than expected, provide grounds for only very cautious optimism.