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The rate of decline in the US housing market is continuing to surprise the pundits.
The number of housing starts – that is, new home construction – fell 6% in August, down almost 20% on last year, the worst annual decline in four years, and a much worse fall than expected. That came hot on the heels of news from the National Association of Home Builders that house builders’ confidence is at its lowest since 1991.
“This implies an increasingly negative outlook for the consumer sector given the importance of equity withdrawal and the positive wealth effects housing has provided for the consumer in recent years,” said James Knightley of ING Financial Markets to the Independent.
And unfortunately for the world economy, a negative outlook for the US consumer means that things don’t look great for the rest of us either…
Soaring US house prices have been the main thing propping up the consumer since the tech boom turned into a bust at the start of the millennium.
As Bloomberg says: “Five years of record home sales and price gains supported the US economy through an internet stock plunge, terrorist attacks on New York and Washington, bankruptcies at… Enron and… Worldcom, US invasions of Afghanistan and Iraq and a surge in oil prices.”
How has one market managed to bear the weight of all this bad news? Simple. In the past five years, figures from US mortgage behemoth Freddie Mac show that Americans have withdrawn $727.4bn in equity from their homes through “mortgage refinancing” – which is a long-winded way of saying they have “taken on more debt”.
But that trick only works when the market is rising. And those days are already long gone.
Joseph Stiglitz, who won the Nobel Prize for Economics in 2001, says: “There’s a real problem, not just for the housing sector but for the whole economy. There is a significant possibility of a slowdown so large that it falls into the category of a recession.”
It strikes us that you don’t need to be a Nobel-winning economist to be able to work that out. But still some pundits are trying to put a brave face on what the International Monetary Fund believes is the one of the biggest threats to the global economy today. “Housing is clearly in the midst of a hard landing and the trough seems to be some way off. However, in the absence of a recession, a national house price crash still remains unlikely,” Patrick Franke of Commerzbank told the Independent.
We must admit, we were of the impression that the housing crash would cause a recession, not the other way about. But in any case, one Mike Morgan, Florida mortgage broker, begs to differ with Mr Franke. “Will there be a hard landing? No. Will there be a crash landing? Absolutely!”
Speaking to Whiskey & Gunpowder’s Mike Shedlock, he points out that the jobs created by the housing boom are already at risk – and this is at a point when house prices have barely begun to fall. “Loss of hundreds of thousands of jobs created from housing will act like a virus and spread throughout our economy… I spoke with a real estate agent the other day who has not sold a home in three months. His wife works for a title company and was just laid off. He’s now sending out applications for a job in his former field of banking.” Mr Morgan himself warns that “realistically, if things do not pick up within 90 days, I will close my office and concentrate on my other businesses.”
The worries over the housing market make it more likely that the Federal Reserve will hold interest rates when it votes on its latest move later today. But as Gerard Baker pointed out in The Times earlier this week, “US inflation, however you measure it, is now running at about 3% per year. That ought to be too high for the Fed’s comfort… inflation as a whole now seems broad-based enough and has enough momentum to withstand a bit of downward pressure from global commodites. With short-term interest rates at 5.25%, in real terms monetary policy can hardly be described as tight by any historic standards. It usually takes real rates – a little over 2% now – of 3-4% or more to bear down significantly on price pressure.”
And on Bloomberg we read that unit labour costs rose 4.9% in the second quarter on last year, and gained 9% in the first quarter. Those are the biggest “back-to-back increases since 2000, and a sign of a classic inflation cycle”, according to Allen Sinai of New York-based Decision Economics.
Again, Ben Bernanke finds himself between a rock and a hard place. But given the choice between increasing pressure on homeowners on one hand, and risking inflation taking off on the other, we’re almost certain he’ll choose the latter. That’s bad news for the dollar.
And meanwhile, it’s probably too late for the housing market. US median house price may fall next year for the first time since the Great Depression, Gabriel Stein of Lombard Street Research tells Bloomberg. Last year, the US savings ratio went negative on an annual basis, also for the first time since the Great Depression.
We imagine that we will be seeing a lot more problems that haven’t happened since the Great Depression in the coming months.
Turning to the stock markets…
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In London, the FTSE 100 slipped 58 points to close at 5,831, with many blue-chips closing at day lows. The falls were led by British Energy which suffered a share price drop of over 8% yesterday following an announcement that it was to cut output targets for this year. The firmer price of crude lifted stocks in the oil sector, with BG and BP both making modest gains. For a full market report, see: London market close
Across the Channel, shares also slid lower, suggesting nerves ahead of today’s US interest rate decision. The Paris CAC-40 closed 30 points lower, at 5,115, whilst the Frankfurt DAX-30 closed 52 points lower, at 5,873.
On Wall Street, the Nasdaq ended its seven-session run of gains as Yahoo fell on a sales warning, dragging all internet stocks lower: the tech-heavy index closed down 13 points, at 2,222. The Dow Jones ended the day 14 points lower, at 11,540. And the S&P 500 slipped 2 points to close at 1,318.
In Asia, markets were jittery following the military coup in Thailand. The Nikkei 225 fell 155 points to close at 15,718 this morning.
The oil price staged a retreat last night. Crude oil was trading at $61.49 in New York this morning, and Brent spot was at $60.36 in London.
Spot gold tracked the weaker crude price yesterday, and last traded at $573.90 this morning.
And in London this morning, retailer Woolworths published an adjusted first-half loss of £66.8 million, wider than the same period last year. Attempts to win back customers from supermarkets such as Tesco by cutting prices, redesigning stores and launching online offers appear to have had little impact on sales.
And our two recommended articles for today…
What mortgage-backed securities mean for the US housing market
– Hyper growth in the mortgage-backed securities market has enabled massive growth of the mortgage industry – and US homeownership – in recent years. And now they’re being introduced into the UK. But what are MBSs? Who is Fannie Mae? How do mortgage-backed securities fit into current market conditions? Dan Amoss of the Daily Reckoning takes a closer look:
What mortgage-backed securities mean for the US housing market
Who will lose out from the trend for cheap chic?
– It’s the Primark effect: hard-pressed consumers are turning away from expensive branded goods in favour of cheap alternatives. But this change in consumer sentiment could be damaging. To find out why, for those with fewest resources, cheap could be anything but cheerful, read:
Who will lose out from the trend for cheap chic?