2007 September 27 Thursday
Housing Prices Continue Decline

Good news for the renters. The housing market in the United States keeps going down.

Purchases of new homes fell to an annual rate of 795,000, an 8.3 percent decline from July, as inventory levels rose to their highest level since March, the Commerce Department said this morning. The median price for a new home was down 7.5 percent from a year ago, to $225,700, marking the steepest monthly price drop since December 1970.

Will the housing bust cause a recession? It is not working along in that direction. The rising price of oil is also a weight on the economy.

Another index measured a smaller but still substantial housing price drop.

The S&P/Case-Shiller home-price index, also out Tuesday, is deemed a more accurate gauge. It showed that prices in 20 U.S. metro areas fell 3.9% in July vs. a year earlier, worse than June's 3.4%. A 10-city index showed prices down 4.5%, the worst in 16 years.

One way to look at housing is housing construction as a measure of total GDP.

The United States reached its peak of residential construction-to-GDP at 6.3% in the fourth quarter of 2005, the highest level since the baby boom in the early 1950s. Prices increased a total of 2.6% since then, but have been declining since the first quarter of 2006.

Some countries have been in even bigger housing construction booms.

Nevertheless, Goldman points out the rise in residential construction has been very pronounced throughout the OECD. In the U.K. Canada and Australia, construction spending over 2003-2006 was more than one percentage point above the 1990-2002 average. In Canada, it's currently higher than the United States at around 7%. In Spain, its averaged 8.7% since 2003 and in Ireland it was astonishing 14.2% between 2005-06, though prices have now begun to cool.

The credit fears among the banks seem the scariest aspect of this situation.

"We're still a long way from resolving this whole crisis," said Robert McAdie, head of credit at Barclays Capital. "Banks are not willing to lend to each other beyond a week. The current situation is more systemic than the crisis in 1998. It effects far more institutions and will have a much greater impact on the global economy."

He said the relief rally in stock markets since the Fed slashed rates would come face to face with reality soon enough. "The equity markets are pricing in a 'Bernanke Put'. They are betting that the Fed will cut again and again, but they not factoring in the effect that this credit squeeze is having on the financial system," he said. "Cheap money is now history. There are not going to be any more of the big leveraged buy-out deals for a long time because the CLO [collateralised loan obligations] market that financed them is effectively closed," he said.

So there isn't just a credit crunch for housing. Much less capital is available for leveraged buy-outs as well. Will we see a downturn in capital investment?

The head of Fannie Mae does not see a bottom on home prices until the end of 2008.

Fannie Mae Chief Executive Officer Daniel Mudd said the housing slump will last beyond next year, dragging down home prices and increasing credit losses.

``We don't think we hit a bottom until the end of '08 and then we have some period of time to work our way back up again,'' Mudd said today in an interview in Washington.

At least the decline in the dollar is boosting exports.

The Commerce Department said the downward revision to growth reflected an increase in imports of both goods and services, which subtract from GDP growth. Imports fell a revised 2.7 percent in the quarter, not as steep a decline as the 3.2 percent decline estimated earlier. Exports rose 7.5 percent in the second quarter.

Housing was the main drag on growth. Spending on residential investment declined 11.8 percent in the second quarter, after plunging 16.3 percent in the first quarter.

Meanwhile the housing boom in China has reached a level where the transaction rate has dropped and maybe the market there will pop?

Prices for high-end homes in China's capital have been bouncing to record new levels all year, even with dramatically fewer transactions, rental prices flat and many new units empty.

Some showrooms have fallen dead quiet. But popular addresses that hit the market a few years ago at $1,200 a square meter, or $112 a square foot, are now commanding prices of $2,500 to $4,000 a square meter as their final stages are completed. Developers and owners, as the local media put it, are "going with the wind."

Will China's economy pop? Or can the Chinese central government insulate it from a global recession?

Share |      By Randall Parker at 2007 September 27 08:19 PM  Economics Housing


Comments
John S Bolton said at September 28, 2007 1:33 AM:

It is very difficult for the PRC to keep its dollars from leaking into domestic luxury uses. Hundreds of billions of dollars, just to be held as reserves and not become part of someone's collateral for a loan, is a hard task to keep sealed-off.


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