House Price Outlook (14th January - 3rd February 2008)

This website is about the coming house price crash. But in order to understand the drivers for house prices going forward we first need to understand current economic conditions and anticipated future trends. Which Way Home provides a quick summary of these factors twice a month in the “Latest Market Outlook” section of the website. I hope you find it useful…

In the first half of January I suggested that we will see interest rate cuts, a falling dollar, rising commodity prices, corporate difficulties and resulting stock market falls. The second half of January was therefore no surprise to the readers of the last Market Outlook.

Banking giants Citigroup and Merrill Lynch both posted losses of $9.8 billion in the fourth quarter of 2007. The banks reported dismal results and huge write-downs to cover the losses incurred investing in sub-prime mortgages and other debt instruments. Citigroup wrote down $18.4 bil in mortgage related assets, slashed its dividend and cut more jobs. Merrill wrote down $16.7 bil in assets. Citi and Merrill were joined by JP Morgan in the quest for multi-billion cash infusions from foreign and domestic investors. Fortunately all three received the funds they require to keep operating for the time being.

Bond insurers MBIA and Ambac fell hard during the period after bond rating agencies warned of possible downgrades to their credit ratings. Bond insurers cover the interest and capital repayments of a bond in the event that the issuer of that bond fails to do so. This is usually because the issuer has run into financial difficulties. The bond insurer charges a fee to the issuer for this service and it is important that the bind insurer’s credit rating is almost perfect. Both MBIA and Ambac posted huge Q4 losses on big write-downs and MBIA tried to assure investors that it has enough liquidity ($1.5 bil) to ride out the meltdown in the mortgage market. However, some critics believe (correctly in my opinion) that much larger losses loom.

To add further insult to financial sector’s injuries, the French bank Societe Generale revealed that one of their traders used massive fraud to hide billions of dollars of fraudulent trades, losing the bank $7.2bil. SocGen was forced to obtain emergency cash from its rivals. It also revealed big sub-prime related write-downs. The future of the bank remains in question.

On the economic front, housing starts plunged in December, retail sales suffered their worst December drop in 16 years with annual gains at a 5 year low, inflation was reported as the worst in 17 years (consumer prices rose 4.1% in 2007, on soaring food and energy costs), 17000 jobs were shed in January which is the first drop since Aug 03.

On January 22nd the U.S. Federal Reserve cut interest rates by 0.75%, the first emergency cut since 9/11 and the biggest ease since 1984. The Fed cited “increasing downside risk to growth”. Futures traders expected a further 0.5% cut at the Fed’s Jan 29-30th meeting and were not disappointed. The Fed announced a further 0.5% cut on Jan 30th taking rates down a total of 1.25% to 3.0% in the space of 8 days, almost unheard of in central banking history and highlighting panic at the Fed. Yet more cuts are expected by traders at the March 18th meeting.

It is a worrying sign for the future that 6 months ago everything seemed fine, and yet a short time later the Fed is now spooked enough to make large cuts in interest rates to save the economy. A huge bubble which took a long time to inflate is deflating at breakneck speed. This crisis is only just getting started. The fallout will be highly damaging and will last many years. Don’t be expecting a quick fix.

Turning to the stock market, equities moved low enough to declare that the Nasdaq has entered a bear market as it has now fallen more than 20% from its October peak. The Nasdaq was not alone with Australia, China, Japan and India all falling into bear market territory. The current stock market correction continues to grind down equities. During the period the market couldn’t sustain any kind of rebound with heavy selling in the global markets on 21st and 22nd. European bourses on Monday 21st suffered their worst losses since 9/11.

Gold rose, closing around $905oz for the period while the dollar plummeted as the interest rate cuts made dollars less valuable.

So in summary, weak stock market, companies struggling with bad debts and the limited availability of credit, rising commodities, and weak economic data suggesting further pressure on house prices.

Keep reading and keep updated.

Which Way Home