US housing market 'freefall' continues

The rate of decline in the US housing market is continuing to surprise the pundits.

The number of housing starts - that is, new home construction - fell 6% in August, down almost 20% on last year, the worst annual decline in four years, and a much worse fall than expected. That came hot on the heels of news from the National Association of Home Builders that house builders’ confidence is at its lowest since 1991.

“This implies an increasingly negative outlook for the consumer sector given the importance of equity withdrawal and the positive wealth effects housing has provided for the consumer in recent years,” said James Knightley of ING Financial Markets to the Independent.

And unfortunately for the world economy, a negative outlook for the US consumer means that things don’t look great for the rest of us either…

Soaring US house prices have been the main thing propping up the consumer since the tech boom turned into a bust at the start of the millennium.

As Bloomberg says: “Five years of record home sales and price gains supported the US economy through an internet stock plunge, terrorist attacks on New York and Washington, bankruptcies at… Enron and… Worldcom, US investions of Afghanistan and Iraq and a surge in oil prices.”

How has one market managed to bear the weight of all this bad news? Simple. In the past five years, figures from US mortgage behemoth Freddie Mac show that Americans have withdrawn $727.4bn in equity from their homes through “mortgage refinancing” - which is a long-winded way of saying they have “taken on more debt”.

But that trick only works when the market is rising. And those days are already long gone.

Joseph Stiglitz, who won the Nobel Prize for Economics in 2001, says: “There’s a real problem, not just for the housing sector but for the whole economy. There is a significant possibility of a slowdown so large that it falls into the category of a recession.”

It strikes us that you don’t need to be a Nobel-winning economist to be able to work that out. But still some pundits are trying to put a brave face on what the International Monetary Fund believes is the one of the biggest threats to the global economy today. “Housing is clearly in the midst of a hard landing and the trough seems to be some way off. However, in the absence of a recession, a national house price crash still remains unlikely,” Patrick Franke of Commerzbank told the Independent.

MoneyWeek admit they were of the impression that the housing crash would cause a recession, not the other way about. But in any case, one Mike Morgan, Florida mortgage broker, begs to differ with Mr Franke. “Will there be a hard landing? No. Will there be a crash landing? Absolutely!”

Speaking to Whiskey & Gunpowder’s Mike Shedlock, he points out that the jobs created by the housing boom are already at risk – and this is at a point when house prices have barely begun to fall. “Loss of hundreds of thousands of jobs created from housing will act like a virus and spread throughout our economy… I spoke with a real estate agent the other day who has not sold a home in three months. His wife works for a title company and was just laid off. He’s now sending out applications for a job in his former field of banking.” Mr Morgan himself warns that “realistically, if things do not pick up within 90 days, I will close my office and concentrate on my other businesses.”

The worries over the housing market make it more likely that the Federal Reserve will hold interest rates when it votes on its latest move later today. But as Gerard Baker pointed out in The Times earlier this week, “US inflation, however you measure it, is now running at about 3% per year. That ought to be too high for the Fed’s comfort… inflation as a whole now seems broad-based enough and has enough momentum to withstand a bit of downward pressure from global commodites. With short-term interest rates at 5.25%, in real terms monetary policy can hardly be described as tight by any historic standards. It usually takes real rates – a little over 2% now – of 3-4% or more to bear down significantly on price pressure.”

And on Bloomberg we read that unit labour costs rose 4.9% in the second quarter on last year, and gained 9% in the first quarter. Those are the biggest “back-to-back increases since 2000, and a sign of a classic inflation cycle”, according to Allen Sinai of New York-based Decision Economics.

Again, Ben Bernanke finds himself between a rock and a hard place. But given the choice between increasing pressure on homeowners on one hand, and risking inflation taking off on the other, we’re almost certain he’ll choose the latter. That’s bad news for the dollar.

And meanwhile, it’s probably too late for the housing market. US median house price may fall next year for the first time since the Great Depression, Gabriel Stein of Lombard Street Research tells Bloomberg. Last year, the US savings ratio went negative on an annual basis, also for the first time since the Great Depression.

Moneyweek expect a lot more problems that haven’t happened since the Great Depression in the coming months.

I usually leave it to the reader here to google their own stories, but This one was worth presenting on it's own. There are lots of very poignant "sound bites" in this article.

2 posted on 09/30/2006 12:37:11 PM PDT by RobRoy (Islam is a greater threat to the world today than Naziism was in 1937.)

I don't think this has anything to do with bush. In fact, I think it would have been worse with kerry or Gore.

4 posted on 09/30/2006 12:40:49 PM PDT by RobRoy (Islam is a greater threat to the world today than Naziism was in 1937.)

This so-called "free fall" is just a correction back to what used to be normal. Instead of top dollar taking 15 to 45 days like it did a couple of years ago, it's now taking 90 to 120 days. Instead of 15-25% appreciation in a year's time we're only going up 3-7%. It is nowhere near a crash yet, no matter how desparate the RAT media is to scare people.

5 posted on 09/30/2006 12:41:27 PM PDT by JimRed ("Hey, hey, Teddy K., how many girls did you drown today?" (Hello, I'm a TAGLINE virus. Please help m)

While I would normally agree with you, this close to an election I'm positive it's Bush and the Republicans faults.

7 posted on 09/30/2006 12:42:33 PM PDT by Moonman62 (The issue of whether cheap labor makes America great should have been settled by the Civil War.)

A weak dollar will bring back more foreign investors to out real estate market ;-)

8 posted on 09/30/2006 12:45:09 PM PDT by Moonman62 (The issue of whether cheap labor makes America great should have been settled by the Civil War.)

9 posted on 09/30/2006 12:46:13 PM PDT by RobRoy (Islam is a greater threat to the world today than Naziism was in 1937.)

This is "freefall"?

I have seen freefall, and this ain't it, yet.

Freefall is interest rates at 17%, and no buyers, at ANY price. Freefall is a billbord outside town, saying, "Will the last person to leave Seattle please turn out the lights?" Freefall is fires raging through a neighborhood and nobody calling the fire department. Freefall is a mortgage company running away from a voluntary conveyance by a mortgagor who just wants to get out from under.

10 posted on 09/30/2006 12:47:03 PM PDT by alloysteel (In war, disproportionate force is the ONLY way to assure victory and subsequent peace.)

The Drive By Media keeps talking down the economy. Gloom and Doom. We're all gonna die! And yeah - the onset of another Great Depression is just waiting around the corner. The Democrats are counting on everything to go south by November. Its the only prayer they have of winning.

"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." -Manuel II Paleologus

11 posted on 09/30/2006 12:47:40 PM PDT by goldstategop (In Memory Of A Dearly Beloved Friend Who Lives On In My Heart Forever)

No, not yet.

Many comments from people saying it isn't that bad remind me of theold joke about the guy that feel off a 30 story building. As he passed the 4th floor someone yelled out, "are you ok?"

His response, "So far, so good."

This thing has barely begun.

14 posted on 09/30/2006 12:49:37 PM PDT by RobRoy (Islam is a greater threat to the world today than Naziism was in 1937.)

Just sold my house on Sunday. The return over the last 3.5 years was 10% annually. While the market has slowed in my area, a well-kept home at a reasonable price will still sell. You just won't get panic bidding in an attempt to buy the house, as was occurring last year.

I dare say developers may have gone a little overboard in recent years in some areas.

In my area (suburban Detroit) the economy is rather strong compared to the rest of the state but not enough to support all the housing starts. You can go mile after mile after mile in any direction and there are 1000's of new homes being built by developers, or finished and just sitting there. Many local developers have hosed themselves already.

Interesting though, new homes over $600,000 are selling fast, go figure.

I think it will be after November. I think it will really sink in when the annual boom in real estate business does not materialize next year.

17 posted on 09/30/2006 12:50:47 PM PDT by RobRoy (Islam is a greater threat to the world today than Naziism was in 1937.)

Freefall is interest rates at 17%, and no buyers, at ANY price. Freefall is a billbord outside town, saying, "Will the last person to leave Seattle please turn out the lights?" Freefall is fires raging through a neighborhood and nobody calling the fire department. Freefall is a mortgage company running away from a voluntary conveyance by a mortgagor who just wants to get out from under.

Ahh ... you must be refering to the Carter years ;)

18 posted on 09/30/2006 12:52:40 PM PDT by Centurion2000 ("Be polite and courteous, but have a plan to KILL everybody you meet.")

I also am waiting to see if it sticks. Not to compare it to stocks really, but before the stock market crash of '29 there were mini-crashes followed by temporary regains. Where this whole real estate bubble thing is gonna go will be VERY apparent, one way or the other, by next April.

19 posted on 09/30/2006 12:53:46 PM PDT by RobRoy (Islam is a greater threat to the world today than Naziism was in 1937.)

"Interesting though, new homes over $600,000 are selling fast, go figure."

So far...

20 posted on 09/30/2006 12:55:11 PM PDT by RobRoy (Islam is a greater threat to the world today than Naziism was in 1937.)

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.