Wednesday, March 26, 2008

House price slump in US dashes hope of end to credit crisis

Wednesday, 26 March 2008By Stephen Foley in New York

Declines in US house prices are continuing to accelerate, according to surveys that signal there will be no quick end to the credit crisis.

The price of the average home was 11 per cent lower than a year ago, the S&P Case-Shiller index showed yesterday, as repossessed homes flood the market – and economists predict that the price adjustment may belittle more than half over.

The Case-Shiller index has become one of the most widely followed measures of the US economy because American homes are the collateral that supports hundreds of billions of dollars of mortgage-backed securities and other credit derivatives.

The latest figures cover house prices in 20 metropolitan areas in January, and show that price declines have spread far beyond the once-hot speculative property markets in Florida and the South-west and crumbling industrial towns. Now, Charlotte, North Carolina, is the sole region showing year-on-year gains.

The year-on-year decline of 10.7 per cent in the average house price is worse than anything seen in the last downturn in the early Nineties. Prices fell 2.4 per cent in just one month.

"It does not look like early 2008 is marking any turnaround in the housing market,," said David Blitzer, S&P index committee chairman. "Home prices continue to fall, decelerate and reach record lows across the nation. No markets seem to be immune from the housing crisis."

A second measure of the housing market, by the mortgage regulator Ofheo, showed a 3 per cent year-on-year decline in January. It excludes many pricier homes.

Falling property values are now feeding through into weaker consumer confidence. The monthly Conference Board survey set a new five-year low in March, the reading of 64.5 coming in well below Wall Street expectations of 73. It was the third sharp decline in as many months.

The disappointing data came a day after sales figures for February had raised hopes that a bottom might be near for the beleaguered housing market. An estate agents' survey showed a modest increase in activity, suggesting that falling prices have lured bargain-hunters into the market.

Many economists, though, said the picture will not become clear until the spring selling season.

Kevin Logan, senior US economist at Dresdner Kleinwort, said he expected house prices would eventually reset to 2004 levels – about a 20 per cent decline from their peak in 2006. "The number of sales is still about 20 per cent below their year-ago levels, and we are still in a down trend. The housing market is in a slump and it is not coming out of a slump this year."

There are already large numbers of unsold homes and an expected wave of repossessed properties still to hit the market, Mr Logan added, while mortgage lenders are demanding bigger deposits and more financial checks on borrowers. "The background is pretty grim."

His comments were echoed by David Stubbs, senior economist at Rics in London. "Prices on the Case-Shiller index have at least a further 10 per cent to fall before they stabilise," he said. "The existing homes sales figures for February which showed a modest bounce are likely to be reversed in coming months as the pressure on the US economy intensifies, and the labour market continues to weaken. Any lasting stabilisation in sales activity appears to be at least six months in front of us, if not more."

Yesterday's economic data brought a halt to a two-session rally by the Dow Jones Industrial Average, which closed 0.1 per cent lower at 12,532.6. Asian and European stock markets – playing catch-up with Wall Street's strong showing late last Thursday and on Easter Monday – were all higher yesterday.

Wall Street firms have written off more than $120bn (£60bn) of their investments in mortgage-backed securities and more complex derivatives that include US home loans, but the ultimate level of their losses will depend on where house prices settle and on how many borrowers fail to keep up payments.

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