“We’re still headed down,” said David Blitzer of Standard & Poor’s. This Tuesday, more bad news from the sector that kicked off the credit crisis that put world markets back into a tailspin. The Case-Shiller US National Home Price Index fell by 3.2% in the second quarter – down from a 1.6% decline in January to March and the biggest fall since its inception in 1987. A slump in US consumer confidence to a one-year low compounded jitters.
The outlook for housing
The figures are set to get worse, said Nils Pratley in The Guardian; in July and August, mortgage lending “virtually came to a halt”. Credit conditions are tightening “for all but the most basic mortgages”, as Lex said in the FT, and high levels of unsold homes also point to lower prices.
There is now almost ten months’ inventory sitting on the market, a 16-year high. And the adjustable interest rates on mortgages worth $750bn will rise over the next year, implying further rises in default rates, which will boost supply. Around two million defaults are expected before this cycle is complete, said Bill Gross of Pimco, with the likely result that prices will fall by around 10%. Given that 70% of Americans are homeowners (most don’t rely on stocks for their nest egg) they are facing “an asset deflation never seen since the Great Depression”.
What next?
The sharpest decline in consumer confidence in two years in August shows the housing malaise is “starting to seriously shake the previously unshakeable consumer”, as David Parkinson put it in Canada’s Globe and Mail. Higher house prices have underpinned consumption (worth 70% of GDP) by encouraging spending or directly financing it through mortgage equity withdrawal. Consumption growth has already weakened as house prices have stopped rising. Home equity withdrawal more than halved to $228bn last year, with half the sum devoted to buying big-ticket items, said Jaqueline Thorpe in Canada’s National Post. Consumption growth has fallen from 3.7% in the first quarter to 1.3% in the second, and has been flat for the past four months.
With no savings and record debts – a record 15% of after-tax income is now devoted to servicing household debt – consumers have scant room for manoeuvre. The deteriorating employment picture also bodes ill for consumption; 25,000 financial services job cuts were announced in just the past month, as Merrill Lynch’s David Rosenberg pointed out. As “the mainstream economics community is whistling past the graveyard, recessionary pressures are building”.