Pity the poor unfortunate American who took out a new mortgage in May 2004. It must be especially unfortunate if this US house buyer took out a big mortgage, the maximum he could borrow, for example. We say this because two years on, the US rate of interest has risen from 1 percent to 5.25 percent. That’s a 525 percent increase. No wonder bodies such as the IMF have been warning of the dangers of a potential crash in US house prices. And now the omens are not looking good. According to The National Association of Realtors, the median price of US homes for sale has fallen by 1.7 percent from a year earlier in August. That’s the first fall since April 1995, and the biggest yearly drop since November 1990. And yet, US housing experts are still talking soft landing, predicting modest falls lasting only a year, before normal service is resumed. They point to the UK and Australia, and say no crash occurred, and the pattern will be repeated in the US. They could be right, but alas, there are many reasons why they could be wrong.
First potential nail in the US property market coffin is the rise in interest rates we referred to above. In the US, mortgages often hold a fixed rate of interest, and the market is not quite so vulnerable to rises in the rate of interest as the UK market. Even so, a 525 percent increase is a big jump. Over this cycle the UK rate of interest has gone from 3.75 percent to 4.75 percent, a much more modest change.
The second nail relates to the number of properties on the market. In the UK, just as demand is low, so too is supply. An Englishman’s home is his castle, or so they say, and the response to a fall in demand for property prices in the UK has for many been a case of upping the drawbridge, topping up the moat, and preparing to withstand a siege. But, in the US, the supply of homes is up too. Moreover, the US does not suffer from the land shortage issues that beset the UK. While the UK suffers from a long-term shortage of housing, in the US there has been a 38 percent rise in the number of homes on the market, compared to a year ago. There’s a 7.5 month supply of homes for sale, compared to just 4.5 percent a year ago. April 1993 was the last time the monthly supply ratio was so high.
Then there’s the contrast between the US’s role in the global economy and the UK or Australia’s position. As the property market had its hiccup last year, both here and down under, which combined with (or more likely caused) the retail slowdown, the UK was to an extent bailed out by the US. The UK stuttered, but the rest of the world was immune, and as result, the UK’s sneeze never got more serious.
But while the UK accounts for just 5 percent of global output, the US accounts for 33 percent. Uncle Sam is less able to look outside of his borders for a cure to the festering illness.
It’s all very serious, of course, because if US house prices do crash, recession may well occur in the US, and the rest of the world may well find themselves confined to bed, as the germs spread.
But then#133;..
Oil is down in price. Most economists in the US expect the rate of interest to fall next year, and actually the stats for the last month on month change in median house prices were not too bad. David Lereah, chief economist for The National Association of Realtors put it quite mildly when he said in the group’s statement: “We do expect an adjustment in home prices to last several months as we work through a build-up in the inventory of homes on the market.”
Time has the answer. Right now, the US is walking a tight rope, and for our money, it could go either way.
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