US house prices keep on falling

S&P Aug.jpg
US house prices, according to today’s S&P/Case-Shiller Index, are still falling quite sharply. As shown in the chart, they are now down 17% versus last year. The key influence, according to S&P, is that ‘the markets that were the high-flyers during the recent real estate boom continue to be the ones that are leading the current decline’. Thus prices in Miami, San Francisco, Las Vegas, Los Angeles, Phoenix and San Diego are all down around 25%, whilst cities such as Atlanta, Chicago, Detroit, Minneapolis and Washington are ‘only’ down around 10%.

Separate reports from the Realtors Association and the Commerce Dept this week added to the gloom. These showed:
• Sales of existing homes were down 13% from 2007 levels, and inventories rose to over 11 months of supply at current sales rates.
• Sales of new homes were down 35% in July, versus last year, and although inventories dropped slightly, they still stand at over 10 months.
• Over 1/3rd of all sales were ‘distressed’, including foreclosure. And the number of properties at risk of foreclosure is rising sharply, up 55% from last year.
The problem is that although the US Fed has cut headline interest rates by 3.25% over the past 12 months, borrowers have seen little benefit. Actual rates paid by homeowners averaged 6.43% in July, versus 6.7% last year. So unfortunately, as the blog warned 6 months ago, the Fed’s efforts are ‘like pushing on a string’. The peak sales seen in 2006-7 were the result of lax lending standards, and sales are unlikely to recover whilst lenders continue to tighten back to more normal levels.
Meanwhile, a second phase of the downturn now seems to be underway, with home builders cutting back quite sharply. New housing starts in July were at the lowest level since 1991. Of course, this type of reduction in supply is essential if the market is to bottom. But, as US Housing Secretary Steve Preston said yesterday, any real improvement is now unlikely to happen until ‘well into 2009’.
This is all very bad news for the global chemical industry. Domestic producers will suffer a loss of demand due to fewer homes being built. As will Asian exporters, whose products are used in the manufacture of white goods (refrigerators, microwaves etc) and furnishings for US homeowners. Equally, failing house prices eliminate the potential for mortgage equity withdrawal, and so we must expect that auto sales (another major source of chemical demand) will also continue to weaken.

1 thought on “US house prices keep on falling”

  1. Hi Paul
    Idle few moments as I wait for the rain to clear in the hope of resuming my tennis match!
    The Alistair Darling article in The Guardian was interesting and prompted me to post the following comment on The Economist site:
    A good friend and colleague of mine, Paul Hodges who runs a consultancy that helps companies think outside the box –
    predicted $100 crude and the collapse of Bear Sterns on his blog –
    A few months ago he also predicted that the UK economy would go through a much worse downturn than few people were predicting, at least publicly.
    It was interesting that this Economist article should appear on the same day that Alistair Darling warned in The Guardian today that “Britain is facing arguably the worse economic downturn in 60 years” and that it could be “longer lasting and more profound” than people had expected.
    As an ex-pat who has lived in Singapore for the last 11 years and visits home 2-3 times a year, I have long thought that we’ve been living on borrowed time – or more appropriately, borrowed money.
    It is ironic when you think that one of the reasons why the consumer-led boom lasted so long in the West could be the root of a deep and long-lasting recession that could raise the old question “what does Britain make anymore – and where do our long-term comparative advantages really lie?
    One of the reasons for the boom was lots of cheap goods from the developing world which created, in effect, a deflationary effect – making consumer-binging so much more affordable. This led to the recycling of the money back to the developing world, mainly China, and this money returned in the form purchases of US Treasury Bills. This in turn kept interest rates very low and forced (or tempted) the financial sector into planting the seeds of the sub-prime crisis through the search for higher yields.
    Energy is the other big worry and I cannot see crude prices falling below $100/bbl over the next five years. This will combine with climate change concerns to create an opportunity, as well as a threat, for Britain.
    In short, don’t build another runway at Heathrow, provide decent public transport and provide incentives for the City types who planted the seeds of our doom to invest in the new “green” economy. It makes more sense that sticking in a traffic jam, burning fossil fuels that we can no longer afford economically or environmentally, while travelling to the next big sale to buy a load of cheap junk from China (also made from oil-based synthetic materials) that you don’t really need.

Leave a Comment