Signs of stability among lenders as investors accepted assurances from US Treasury Secretary, Henry Paulson, that the problems would not spread and would be contained to the subprime area.
Shares prices of groups like Citigroup (Citi, as it is calling itself now) rose strongly, the best in three months while the prices of some of the subprime lenders also bounced.
On the face of it the problems in the US subprime mortgage market are along way from here with only a small impact seen, if at all.
But investors should widen their search: there’s some evidence, anecdotal admittedly, that the crisis (in US terms) in the sector is starting to choke US housing loan activity.
Figures are emerging that the subprime sector was the most widely financed and securitised part of the housing market over the past two years and many of these loans are now going bad because of rising defaults and questionable levels of capital in many of the originating institutions.
That’s why there are nervous glances being made towards such huge financial groups such as Citi, HSBC (which wrote off billions of dollars in dud loans in its result on Monday in London), Goldman Sachs and others which actively helped package and refinance the issuers of these mortgages.
Much of the recent rapid growth in US house prices and home building can be traced to the expansion in the subprime sector.
The sharp drop in US bond rates is telling US that investors in these sectors of the markets want security over higher returns. Indeed reports this week saw new issues of the repackaged home loans are drying up, even though some mortgage rates have started to fall.
That means the pool of money available to lenders will start contracting, resulting in less money for home buyers with credit standards forcing subprime customers either out of the market or to pay more than they can afford.
Already more than 20 subprime finance groups have either gone bust, been sold or are on the market, and some of the biggest (such as New Century Financial) are tottering.
The fear now in the US is that many of the repackaged loans may have been bought by highly geared investors who have financed their positions with borrowed Japanese yen, which has become more volatile in the past week.
Not helping is the sluggishness in the housing sector as a whole. The news last week that January new home sales fell to their lowest level since 1994 didn’t help sentiment. It’s why the subprime crisis could have a more lasting and deeper impact on markets than is apparent.
So why is this important for Australia?
Well the $18 billion takeover offer for Rinker Group from Cemex of Mexico will succeed or fall on the health of the US housing market.
Rinker’s defence is that housing will recover and that Cemex’s price is too low. Cemex’s selling point is ‘accept and get a much better price than you would have if Rinker wasn’t under bid’.
The financial health of building companies like Boral with significant US operations will be impacted as will James Hardie which produced its third quarter figures yesterday
And these problems in the US housing market, especially if demand slows further, will put pressure on the company and on the recently established compensation fund.
Hardie said yesterday that the outlook in North America is still uncertain.
The company reported a bottom line loss of $US8 million, or $A10.4 million for the third quarter compared with a net operating profit in the corresponding quarter a year ago of $A52.89 million.
The year-earlier period was not affected by an asbestos provision, which in the latest quarter included a charge of $US44.8 million ($A58.22 million), dragging down the company’s performance.
Excluding the one-off, the group’s net operating profit was $US36.8 million ($A47.82 million), down 10 per cent.
James Hardie CEO, Louis Gries, says the outlook in North America is still uncertain, but the company expects to continue to outperform the market.
“The outlook for North America remains uncertain and the business has undergone a reset to match production with demand,” Mr Gries said.
“He said the US housing market had deteriorated further during the quarter, but the company’s US Fibre Cement business continued to perform well.
“Indicative of the challenging market conditions in the US is our business recording lower sales volumes in Q3 compared to the same quarter last year,” he said.
Net sales fell two per cent to $US355.10 million ($A461.44 million). But in the nine months sales rose eight per cent to $US1.18 billion ($A1.53 billion).
The company said sales volumes in the US were expected to be affected by the weaker new residential housing market in the final quarter of the (our) financial year.
The company said that in Australia and New Zealand, challenging market conditions were expected to continue, although market initiatives were expected to drive further volume growth.
