House Price Outlook (18th February - 3rd March 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…

House prices in 20 U.S metro areas dived a record 9.1% in December vs a year ago, according to the Case-Shiller index. U.S. house prices overall posted their first annual decline in 16 years with further price drops expected. Sales of new and existing U.S. homes hit multi year lows in January as the number of months’ supply of unsold properties continued to rise. Building permits hit a 16 year low.

Wholesale inflation is soaring. The January producer price index shot up 7.4% versus a year ago, the most since 1981.

On the corporate front UBS revealed plans to raise about $12bil of fresh capital in measures it said were essential to help it tackle the credit crisis.

Commodities continued their run-up. During the period gold, silver, platinum and palladium all broke ground to new highs, a powerful move by all four precious metals. Silver has also broken out against the Euro. Oil topped $101 a barrel, copper surged, cotton hit a 4 year high, coffee a 10 year high, and cocoa neared a 24 year high. No surprise to the readers of this Outlook.

A stock market sell-off on Friday 28th wiped out any gains from the previous week as the Nasdaq skidded to its lowest close of the correction so far.

The topic of the moment is very definitely interest rates. The Fed has already cut rates aggressively (1.25% since the start of the year and 2.25% from their recent peak) and more cuts are expected in March. Published minutes of the Fed’s January meeting signalled it will continue to ease rates and keep them low for a significant span. And that means that the value of the dollar will fall and commodity prices will be pushed higher.

Fed Chief Ben Bernanke also said that credit woes may cause some small banks to fail. He is quite correct but I would go further – I can see some big banks failing, big household names. The contraction in the availability of credit is severe indeed, and many corporations and individuals will find themselves dangerously exposed.

Warren Buffett’s company, Berkshire Hathaway, released its annual letter to shareholders. Mr Buffett has become one of the richest men in the world simply by compounding his returns at an annual rate of 21% for forty two years. His letters are outstanding in their ability to describe complex scenarios in a few short, entertaining sentences. His 2007 letter to shareholders is available here, and I strongly recommend that you all have a read.

In line with the views of Which Way Home, page 3 Mr Buffett describes the recent events as follows: “Some major financial institutions have, however, experienced staggering problems because they engaged in the “weakened lending practices” I described in last year’s letter. John Stumpf, CEO of Wells Fargo, aptly dissected the recent behavior of many lenders: “It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine.”

You may recall a 2003 Silicon Valley bumper sticker that implored, “Please, God, Just One More Bubble.” Unfortunately, this wish was promptly granted, as just about all Americans came to believe that house prices would forever rise. That conviction made a borrower’s income and cash equity seem unimportant to lenders, who shoveled out money, confident that HPA – house price appreciation – would cure all problems. Today, our country is experiencing widespread pain because of that erroneous belief. As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out – and what we are witnessing at some of our largest financial institutions is an ugly sight.”

So to summarise the last couple of weeks, the established trend which has been documented in preceding Market Outlooks is ongoing and will continue over the months and years ahead. Yes that’s right, in the “years” ahead! On that note, I wonder what we talk about in the March 16th Market Outlook?

Keep reading and keep updated.

Which Way Home