Will US housing have a soft landing?
Existing US home sales fall for the seventh consecutive month, yet realtors are still pointing to the UK and Australia, suggesting that a similarly 'soft landing' may be in store for the US. Are they right to be optimistic?
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The US housing slump seems to be worsening.
September saw sales of existing US homes fall at an annual rate of 14.2%. It's the seventh month in a row that sales have fallen.
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More worrying was the fact that house prices fell 2.2% on last year. That was faster than August's fall, and the first back-to-back monthly price declines in 16 years.
But predictably, the realtors and Wall Street like to put a positive spin on these things. Many like to point to the UK and Australia, suggesting that similarly 'soft landings' may be in store for the US.
So are they right to be this optimistic?
According to the National Association of Realtors (NAR) the median average price of a single-family home fell 2.5% to $219,800 in September. It may not sound like much, but that's actually the biggest annual fall the US has seen since records began in 1969.
But in the face of what looks like a housing market rout, economists and realtors pointed to unsold home inventories as a silver lining on a very thundery-looking cloud. Inventories were unchanged at 7.3 months' supply for the third month in a row. That's still a lot higher than average - but Ed McKelvey at Goldman Sachs told Bloomberg: 'You get the sense that the deterioration isn't getting worse. There's a stabilisation in the inventory-to-sales ratio, but at a very high level.'
Some would argue that when prices are falling faster than ever before, things can't really get any worse. But with the Federal Reserve keeping interest rates on hold at 5.25% last night, US estate agents and homeowners seem to be hoping that stable borrowing costs will save the housing market from a pile-up, as they appear to have done in other Anglo-Saxon economies.
Lawrence Yun of the NAR said: "We anticipate further steady declines in inventories, and in early spring 2007, the market could shift from a buyers' market to more of a balanced market."
Are they right to be this upbeat? Certainly, US house prices have risen far less than in the UK or Australia. According to Capital Economics, since 1997, UK prices have risen 205%, while in the US, the gain is just 103%. And they're more affordable too - Americans need just 3.9 times the average salary to buy a house, compared to a long-term average of 3.0. In the UK, a household needs about 5.6 times the average wage, compared to a long-term average of 3.8.
But as CE points out, there are several reasons why even a gentle slowdown could hit the US harder. For a start, consumption in the US has been driven even more than in the UK by people borrowing money against the rising value of their houses (mortgage equity withdrawal). But MEW is plunging, which will have a serious impact on consumer spending.
And the UK was lucky in that in 2004, when the housing market slowed sharply, the rest of the world economy was strong enough to prop the country up. Massive government spending on public sector wages and employment has also provided a crutch for the UK housing market, something which seems unlikely in the States.
But more important is the fact that both the UK and Australia increasingly look as if they have merely delayed a housing crash, rather than avoided it. Inflation in both countries is picking up and interest rates are firmly on the upward path. The Bank of England is almost certain to raise UK interest rates to 5% in November.
Meanwhile, Down Under, consumer price inflation came in above expectations for the third quarter, at an annual rate of 3.9%. That's well above the Reserve Bank of Australia's target of between 2% and 3%. Australian interest rates are already at a near-six-year high of 6%. The bank has hiked rates twice his year already, and is expected to do so again next month.
None of this is good news for householders - despite all the talk of a soft landing, some homebuyers in the Sydney suburbs are facing negative equity, with houses currently selling for less than they did in 2004. If interest rates keep rising, so will the housing pain.
Americans may not be so keen to follow their Anglo-Saxon peers once events unfold over the coming months. For more on the US housing market, subscribers can read James Ferguson's recent cover story online here: How the US housing slump will affect us all
And if you're not already a subscriber, you can get access to all the content on the MoneyWeek website and sign up for a three-week free trial of the magazine, just by clicking here: Sign up for a three-week free trial of MoneyWeek
Turning to the stock markets
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The FTSE 100 closed at its best level since February 2001 yesterday, gaining 32 points to end the day at 6,214. Sugar producer Tate & Lyle topped the leader-board on news that it is intending to dispose of some or all of its European operations. Money manager Amvescap was the biggest faller of the day, having posted lower-than-expected profits due to compensation costs on performance-related options. For a full market report, see: London market close
Elsewhere in Europe, the Paris CAC-40 closed 17 points higher, at 5,422, and the Frankfurt DAX-30 was also 17 points firmer at 6,264.
Across the Atlantic, stocks ended Wednesday higher after the Fed's decision to leave interest rates unchanged cheered investors. The Dow Jones closed 6 points higher, despite disappointing results from Boeing and General Motors, ending the day at 12,134. The Nasdaq was 11 points higher, at 2,356, and the S&P 500 was 4 points higher, at 1,382.
In Asia, the Nikkei closed at 16,811 today, a 112-point gain.
A surprise drop in US crude stocks saw the price head back towards $62 yesterday. Crude oil last traded at $61.56, whilst Brent spot was at $59.39.
After hitting a high of $593 yesterday on the back of the higher oil price, spot gold had slipped back to $590.80 today.
And in London this morning, oil major Royal Dutch Shell posted a forecast-beating jump in underlying third-quarter profit. Excluding one-off items, profits were $7bn compared to $5.8bn in the same period last year. The increase was attributed to stronger-than-expected Q3 production. Shares in Royal Dutch Shell were as much as 3.3% higher this morning.
And our two recommended articles for today...
Is the Dow due for a reversal?
- As the Dow Jones records one record high after another and the FTSE reaches its best level for five and a half years, it seem that investors are unfazed by risks to the economy. Yet the key market indicators paint a darker picture. For RH Asset Management's fortnightly assessment where markets are headed, read: Is the Dow due for a reversal?
Gold's not a barbarous relic, central banking is
- In 1931, JM Keynes referred to the gold standard as a 'barbarous relic'. Yet gold's purchasing power remains relatively unchanged, says Doug Casey, and it is, in fact, central banking which we should really be criticising. To find out what's wrong with central banks - and why you should ignore the critics and hold gold - read: Gold's not a barbarous relic, central banking is
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