End to credit crisis is just an American pipedream

THOSE in the US who have begun predicting the end of the credit crisis ought to have tuned in to National Public Radio last week when they would have heard what the housing crisis means for ordinary Americans.

Stories of families moving back to Mom and Dad's after struggling to either buy a home or keep the one they already had rammed home the message that this is a problem likely to run and run.

At the beginning of the week, it was easy to write these people off as a tail-end minority emerging from the trough of the worst US housing slump in more than two decades. However, opinion has shifted significantly as signs of a continuing decline in house prices and a build up of inflationary pressures have caused Wall Street to worry about consumers' ability to spend the US out of economic slowdown.

"I don't think anybody is fooling themselves that it is going to be easy from here on out," says Paul Ashworth, senior US economist with Capital Economics in Toronto. "House prices are plummeting, confidence is plummeting, and inflation is very much on the rise."

Indeed, the cost of oil and food, not to mention other products, has made investors quite jittery. Although oil prices eased back from an all-time peak of more than $135 per barrel, no one expects any serious relief in the near future.

Even before oil touched these record-breaking levels, the cost of gas had been grabbing headlines for months in the auto-addicted United States. E-mails on how to get best value at the pump – "fill up your tank when the temperature is cooler" – have been zipping their way across the internet for months.

In response, the US House of Representatives overwhelmingly passed legislation last week that would allow member states of Opec to be sued in US courts for limiting oil supplies and colluding to fix prices.

The Gas Relief for Consumers Act is not expected to make it into law, as it must still be approved by the US Senate and President Bush, the latter of whom has already threatened a veto on the basis that such lawsuits would be counter-productive to overall trade. However, this political gesture in an election year should play well with voters who are increasingly short of cash despite the return of tax dollars by the federal government in the coming weeks.

"Obviously we have got the tax rebates coming, so that should be some help (towards boosting consumer spending], but of course a lot of that will be swallowed up by filling up at the pump," says Ashworth.

Meanwhile, US homeowners can only sit and watch as the value of their properties continues to drop. On Thursday, a key government index showed that home prices fell at a record pace in the first three months of 2008, resulting in a year-long decline in house prices.

The house price index produced by the Office of Federal Housing Enterprise Oversight (OFHEO) recorded a 1.7% drop between January and March, the largest quarterly decline since the index began in 1991.

The index is down 3.1% during the last four quarters, the largest decline over that period in the history of the index.

The unease caused by these continuing declines has cut into the profits of nearly every major quoted firm reliant upon the US housing market, as homeowners cut back on everything from major maintenance to the purchase of new fixtures and fittings. Most recently, DIY chains Lowe's and Home Depot fell victim to the spending crunch, while hundreds of thousands of smaller firms are feeling the pinch as well.

Adding to the gloom is the increasingly unlikely prospect that US interest rate authorities will further cut the cost of borrowing. Having slashed rates by 3.25 percentage points since mid-September, the US Federal Reserve has little room left to cut from the current 2% benchmark, particularly against a backdrop of surging prices for energy and commodities. Despite the simple arithmetic weighing against a further cut, some analysts still believe monetary authorities will be forced into further bold moves. The pressure was not eased when a top official from the International Monetary Fund warned on Tuesday that the global economy remained threatened by both financial instability and the spread of slowing US economic growth to the rest of the world.

"We still see serious risks to global financial stability," said John Lipsky, first deputy managing director of the IMF.

"Policy-makers need to avoid complacency and take steps to restore confidence."

Lipsky, whose remarks were made in Tokyo, added that "perhaps extraordinary" measures would be needed if the US economy did not recover from its current malaise later this year.

"Persistently weak US growth would significantly inhibit a return to trend growth in other advanced economies, and could undermine growth in emerging economies as well," he said. Just a day after his comments, the IMF confirmed it was cutting its global growth forecast for 2008 to 3.7%, down from 4.1% previously.

At the heart of Wall Street, the consumer crunch is also making waves. Infamous banking analyst Meredith Whitney – who shot to notoriety when she predicted troubles at Citigroup last autumn – has now weighed in with her opinion that the major US banks will need to take an extra $170bn of write-downs by the end of next year.

The notoriously bearish Whitney cited the collapse of the securitisation business and a "sharp" pullback in consumer spending as the main reasons for this prediction.

There are few among the ranks of analysts who count Whitney as a friend, but there are also few who now disagree that economic recovery will be a long slog, rather than a quick rebound.

"There is no magical cure here," said Capital Economics' Ashworth. "Consumers are just facing a lot of headwinds now."

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Bought but can't hold

Commentary: Put your house on the market now? Are you nuts?

By MarketWatch

Last update: 4:18 p.m. EDT May 23, 2008

CHICAGO (MarketWatch) -- Either American home sellers are an incredibly optimistic lot, or they think they are stock traders who need to dump their assets in a declining market. How else to explain the surge in homes going up for sale in April, in the teeth of the worst downturn in housing since the Great Depression?

Because home buyers are spooked by the current environment, in which home prices have been falling in many markets across the country, there has been a glut of unsold homes on the market for more than a year. Sellers have been cutting their prices to attract the limited buyers out there -- the median price of a home sold in the U.S. in April was off 8% from a year earlier -- but that has done little to cut into the inventory. See full story.

Against that backdrop, sellers still concluded April was the time to move. The inventory of unsold homes on the market jumped 10.5% in April to 4.55 million units. At the current sales pace, that represents an 11.2-month supply of houses -- nearly double what the real estate industry considers to be a health level.

Of course, April is the biggest time of the year for putting houses on the market. That's because of the school-year cycle; families with kids in school who need to move in the June-August summer recess have to get their homes on the market then in order to sell, buy and close on both transactions before the fall term begins.

But even by seasonal standards the number of houses put on the market last month was high. And here is why that is particularly ominous:

• Many of those potential sales are likely forced. Strapped homeowners who are struggling to keep up with mortgage payments may feel compelled to sell and get what they can for their house before the financial burden overwhelms them.
• Many of those houses are foreclosures. With foreclosure proceedings nearly double what they were a year ago, banks are being handed the keys to record number of properties. Their aim is to get rid of them, regardless of market conditions.
• Many of these moves are not discretionary. Let's face it: The job market is not the most stable right now. Folks who face layoffs or are "asked" to transfer may have little choice but to put their home on the market.
• Many of these properties are failed investments. The speculators who bought -- mostly condos -- in the boom times in anticipation of quick profit have been caught with their windows down. They may have been tempted to hold for a rebound, but like stock traders they will also cut and run with no bottom in sight.

Some of the folks who put their houses on the market in April may end up pulling them off the market in subsequent months, once they see how choppy the water really is. But for most, it's now sink or swim.

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Home prices post record decline

A government study finds home prices fell 1.7% in the first quarter of 2008. California, Nevada see sharpest drop.

Compared to the first quarter of 2007, home prices fell 3.1% in the first quarter of 2008.

Washington, D.C. -- The prices of homes sold in the first quarter of 2008 posted a record decline, according to a new report from the Office of Federal Housing Enterprise Oversight.

Home prices fell 3.1% from the first quarter of 2007, the largest decline in the purchase-only index, which excludes refinancings, since the agency began keeping records 17 years ago.

First-quarter prices dropped 1.7% from the fourth quarter, the largest quarterly dip ever.

"It's not going to be the largest decline on record for long," said Peter Schiff, president and chief global strategist at Euro Pacific Capital."Prices are going to keep falling until we get to the equilibrium, which is much, much lower. This is only the beginning."

The inflation-adjusted price of homes fell 7.7% on a year-over-year basis. At the same time, the prices of other goods and services rose 4.6%, according to OFHEO.

"The nominal price declines aren't as spectacular as they would be if we didn't have so much inflation," Schiff said. "Houses are becoming a less valuable asset relative to the cost of living."

OFHEO reported that prices fell in 43 states, with eight states seeing quarterly price declines of more than 3%. California and Nevada were the biggest losers, with home prices falling more than 8% in both states.

Prices on all transactions, including homes sales and refinancings, fell 0.2%year-over-year and remained flat compared to the fourth quarter, OFHEO reported.

California, Nevada, Florida, Arizona and Michigan exhibited the greatest price depreciation in all transactions in the first quarter. Wyoming, Utah, Montana, Texas and Alabama saw prices for all transactions increase the most. 

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