US housing market woes

Source : Sunday Times - 17 Aug 2008

AS the US economy appears more than ever linked to the health of the housing market, analysts see no end to falling prices or recovery in the sector before 2009.

After several years of a sizzling boom, housing prices in the United States have fallen for the past year and a half, according to the closely watched S&P/Case-Shiller index. In May, prices fell a record 16 per cent from a year ago.

But for the majority of analysts, the price decline still is not enough to put the sector on the road to recovery.

‘Home prices in the US are likely to start to stabilize or touch bottom sometime in the first half of 2009,’ former Federal Reserve chairman Alan Greenspan said on Thursday.

But ‘prices could continue to drift lower through 2009 and beyond,’ he added.

Treasury Secretary Henry Paulson regularly repeats that the real-estate sector presently is the biggest danger for the US economy.

Mr Paulson in late July warned that foreclosures and the number of existing homes for sale ‘are likely to remain substantially elevated this year and next and home prices are likely to decline further on a national basis.’ Several factors are at work.

Housing prices, although lower, are still far from reaching pre-boom levels, according to a recent survey by TD Bank Financial Group.

Today’s home prices are roughly at mid-2004 levels, while the S&P/Case-Shiller index shows they are still nominally 34 per cent higher than 2002 prices.

‘The correction isn’t over,’ the TD Bank analysts said, adding that prices have further to fall, particularly in ‘cities such as Los Angeles, Las Vegas, and Miami which saw the largest price gains.’

The inventory of unsold homes on the market is so high - 11 months’ supply for existing homes, 10 for new homes - that sellers will have to lower their expectations before the market can return to normal, which analysts generally see as a five-month supply.

‘The rising share of foreclosed homes in overall sales bodes negatively for home prices,’ said Ethan Harris, chief US economist at Lehman Brothers, who sees prices falling between 25 and 30 per cent in the correction phase of a cycle he sees ending in late 2009.

In fact, the owners of foreclosed homes are often banks, which today hold a sixth of the homes on the market, according to RealtyTrac, a real-estate industry data firm.

The banks have not been shy about disposing of these distressed assets. The Wall Street Journal this week reported on a house in Corona, California, that was sold for US$198,000 9S$182,000) by a subsidiary of Credit Suisse and which was bought for US$450,000 in December 2006.

Another factor weighing on housing prices is the growing difficulty in obtaining a bank loan, and not just for high-risk borrowers.

In the second quarter, 75 per cent of US banks tightened their lending conditions on standard mortgages, home loans to borrowers with good credit histories, the Federal Reserve reported recently.

And the fragile economy’s woes - rising unemployment, inflation-eroded purchasing power and financial turmoil - hardly inspire optimism.

‘The light at the end of the tunnel is a faint and distant one. Further, the risks to this outlook weigh heavily on the downside, with the main risk being the potential for financial markets to unravel further,’ said Ms Celia Chen, director of housing economics at Moody’s Economy.com.

‘It will be well into 2009 before the market works off all the excesses accumulated during the housing boom,’ she said. — AFP