Global meltdown: What got fixed, what needs watching

Source : Straits Times – 12 Sep 2009

The US housing market: Still a house of cards THE storm started here around 2002, in the suburban and regional houses that the United States government encouraged Americans to buy with super cheap loans.

With the stock market booming and interest rates low, everyone piled into the property market, building a housing bubble that was seemingly unbreakable.

Everyone thought home prices would just keep rising. Even sub- prime borrowers with terrible credit histories could get loans. Banks fell over one another to lend them money, knowing that the risk of these loans could be ’swapped out’ by passing them on to investors in financial markets.

But when the bubble did burst towards the end of 2006, everything tumbled down with it, triggering the sub-prime mortgage crisis and leading large banks to write down billions of dollars in losses. Just as the US housing market triggered the crisis, experts are also looking to it to underpin a recovery for the global economy.

To achieve that, prices of houses must stop falling and foreclosures must stop rising. Economists say until that happens, it will be difficult for banks to clean up their balance sheets and resume normal activity.

Where are we now?

After falling by about 30 per cent from their 2006 peak in places like Miami, Las Vegas and Phoenix, home prices rose 2.9 per cent in the second quarter from the first, according to Standard & Poor’s Case-Shiller home price index.Government stimulus efforts, such as the tax credit for first-time buyers, are boosting sales, with sales of new homes jumping 10 per cent and construction of new homes rising 1.7 per cent in July.

But foreclosures keep rising, up 18 per cent last month over the same month last year. Worryingly, the defaults on mortgages involve not just sub-prime loans, but also prime borrowers.

Economists warn that there is still a glut of unsold new and existing homes. While most agree the market has bottomed out, few are expecting a meaningful upturn in prices. With a weak economy, low borrowing rates, tax incentives and refinancing will continue to be vital, but a longer-term concern is whether there will be enough political will to remove these subsidies once a recovery is reached.

Or is the US housing market setting itself up for another collapse?

STATUS: Improving, but still shaky.