Wednesday, June 4, 2008

US Housing Market in Decline

With Barack Obama now having a good chance of becoming the new American President in November, he will probably be hoping that, if he does win, he will be able to inherit an economy in reasonable shape. Unfortunately, any new President is likely to inherit an economy characterised by falling house prices and declining living standards. In particular, falling house prices continue to accelerate and give cause for concern.
"America's house prices are falling even faster than during the Great Depression. As house prices in America continue their rapid descent, market-watchers are having to cast back ever further for gloomy comparisons. The latest S&P/Case-Shiller national house-price index, published this week, showed a slump of 14.1% in the year to the first quarter, the worst since the index began 20 years ago. Now Robert Shiller, an economist at Yale University and co-inventor of the index, has compiled a version that stretches back over a century. This shows that the latest fall in nominal prices is already much bigger than the 10.5% drop in 1932, the worst point of the Depression. And things are even worse than they look. In the deflationary 1930s house prices declined less in real terms. Today inflation is running at a brisk pace, so property prices have fallen by a staggering 18% in real terms over the past year.
" ("The Economist")

Effects of Falling House Prices

  • Reduce Consumer wealth and consumer confidence. This is why many fear a recession in the US. To some extent the lower interest rates and tax cuts have provided a temporary boost. But, if house prices continue to fall, even these maybe insufficient to avoid a recession.
  • Losses for banks. With repossessions rising; banks are losing out because homes are being sold for less than the initial mortgage (especially for people who took out 100% mortgages). The Federal reserve. Banks have stepped up their borrowing from the Federal Reserve.
  • Bank borrowing from the Federal Reserve averaged $15.95 billion in daily borrowing for the week ending May 28.
  • At least some first time buyers may be able to buy a house in the future. Falling house prices are helping to restore affordability. The only difficulty is getting sufficient mortgage finance.

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