Why US house prices will keep crashing
By
Associate Editor
David Stevenson May 01, 2009
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The rot started in the US housing market almost three years ago. And prices have been in freefall ever since.
Yet this week, the US Housing and Urban Development Secretary Shaun Donovan has claimed that "we do have some early signs that the market is stabilising". President Barack Obama sees "glimmers of hope". Meanwhile, Torsten Slok at Deutsche Bank reckons "we're beginning to see green shoots in housing".
And the reason for this excitement? Well, US house prices still fell last month. But it was the first time in 16 months that the decline didn't set a new record.
If you're thinking that this is a pretty slim basis for optimism, you'd be right. Behind the scenes, the market is still deteriorating. And that's bad news for British house prices, too...
Property prices need to stabilise
By now, we probably all know the story behind the banking crisis: how US sub-prime home loans, a vast number of which had been packaged up into supposedly top-notch AAA-rated securities, went sour as US house prices started crashing. And how that bashed huge holes in bank balance sheets round the world. Which meant that many of those banks couldn't continue to lend, but also that they needed some quick-fire bailing out with unimaginable sums of taxpayers' money.
Since then, though, US banks have been proudly announcing blockbuster first-quarter profits. That's hardly surprising with the amount of free money thrown at them by the Federal Reserve (not to mention all the fiddling with the rules on "mark-to-market"). But still, as JP Morgan's finance boss Michael Cavanagh admitted this month, "until home prices stabilise and unemployment peaks, we'll continue to be under pressure for losses on our balance sheet".
"Virtually every investment manager I speak to says that until these [mortgage] securities can be properly valued, a floor cannot be put on the banks' losses", says the Guardian's Patrick Collinson. "And they can't be properly valued until US property prices stop falling".
What's going to happen to US house prices?
So is that about to happen? Not any time soon. To start with, prices just keep on sliding. Even although you can now get "a Florida condo for less than the price of a new car", says Collinson, the S&P Case/Shiller index – the main US house price bellwether – is down nearly 19% year-on-year, having fallen 2.2% in February alone.
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But that's just on the surface. Dig deeper and it gets nastier. If you really want to know what's in store, as David Leonhardt says in the New York Times, the closest thing to a property crystal ball in the last few years has been the auction scene.
That's where the stuff that the estate agents can't shift ends up. In other words, it's the clearing house for housing. And as Leonhardt reports (his piece is well worth a read: For housing crisis, the end probably isn't near) on his own auction visit, the sales just aren't happening. Even the homes that sell are fetching "just a fraction of what they would have even a year ago".
The problem is a growing supply of ever-cheaper properties. Mr Obama came up with a mortgage relief plan to help some distressed borrowers earlier this year. But now that the banks have worked out who's going to get help and who's not, they've kick-started foreclosures again.
In other words, repossessions are soaring once more. More than 800,000 properties received a "default of auction" notice, or were seized, in the first quarter of 2009, the highest since records began four years ago, according to Bloomberg. That's creating a vicious circle - an increasing supply of property results in home values falling further, which in turn drives more foreclosures as Americans simply abandon homes that are deep in negative equity (borrowers are generally not pursued in the US as they are in the UK). Jan Hatzius at Goldman Sachs believes the "massive amount of excess supply" means US house prices nationwide will probably fall an extra 15%.
The story gets even worse. Even plans to help troubled borrowers are only buying time rather than providing a solution - "creating a housing smoke-screen", says Bloomberg's David Reilly. "The likelihood is that many of these loans will go bad anyway". And that's likely to mean even more foreclosures further down the line. Which will just intensify that downward spiral.
And while US house prices keep falling, ever more of the home loans that the banks so willingly advanced in the boom times will have to be written down further. And piling on more pressure just when it's not needed, the US economy overall is shrinking faster than expected – GDP fell by an annualised 6.1% in this year's first quarter.
And why should Britons worry about it?
But why else should Britons worry about imploding US home prices?
Firstly because whatever our politicians are telling us, many banks won't want, or even be able, to lend very much while the losses on their dodgy US dabblings keep growing.
And secondly because what happens in US housing is a good guide to our own property market. The US crash started a good 12-18 months before ours, yet it's continuing. There are more than enough domestic reasons why British property prices will keep dropping, as we've pointed out several times recently: Longer dole queues are bad news for house prices. But while the housing market keeps imploding on the other side of the Atlantic, there's even less chance of a turnaround over here.
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