Wall Street expects the US Federal Reserve to cut interest rates for a second time this year later today, after a slew of negative housing data indicated the economy could be slipping into recessionary territory.
New residential construction has dropped 20% in the year to August, while a report on Tuesday showed that US home prices continue to fall. The S&P/Case-Shiller Home Price index, which measures the monthly annual change in home prices in 20 US cities, showed a larger than expected 4.4% drop in August, with Tampa, Florida and Detroit, Michigan the worst effected areas. Prices in the two cities fell 10.1% and 9.3% respectively, as homebuilders continue to feel the pain. The stocks of Centex (CTX), Pulte Homes (PHM), DR Horton (DHI), and Lennar (LEN) are all down about 50% over the past year.
US Treasury Secretary Hank Paulson said in a speech in New Delhi yesterday, that it could be another year and a half before the market was fully re-priced. “We haven’t hit the bottom yet in housing”, he said.
Investment bank Goldman Sachs expects to see a record 7% annual drop in house prices nationwide by December.
Against this backdrop, there are increasing fears that the US could be heading for a recession, following comments by former Fed chief Alan Greenspan that “prices of homes will continue to go down” until housing inventory – which is currently massively over-supplied – starts falling. And “we’re nowhere near” that point, he said at an investment conference in Bermuda.
The major concern is that falling house prices will hurt consumer spending, which accounts for two-thirds of the US economy. Bill Gross, bonds guru at Pacific Investment Management Co. [PIMCO], expects to see short-term interest rates fall to 3.5%. “An increasingly recessionary looking U.S. economy will likely require 1% real short rates and 3.5% fed funds in order to stabilize a potential growth contraction in lending not witnessed since the early 1970s, or, to be honest, Roosevelt’s depressionary 1930s.”