Another series of tests for the sluggish American housing market this week which is trying to cope with lower demand, oversupply and now the crisis battering the subprime mortgage sector which is threatening to spillover into the sounder parts of the home mortgage industry.
Figures for US housing starts, home sales and a survey of home builders are due for release this week and they will be examined for any impact from the subprime mortgage problem.
This and China’s raging economy will impact stockmarkets.
The Dow dropped 49 to 12,110 on Friday and lost 1.4 per cent for the week; the S&P 500 fell 0.4 per cent on Friday and 1.1 per cent for the week while the NASDAQ eased 0.3 per cent Friday and 0.6 per cent over the week.
This was after the figures were released showing the Consumer Price Index rose 0.4 per cent last month after a 0.2 per cent increase in January.
Core CPI, which strips out food and energy prices, rose 0.2 per cent, after rising 0.3 per cent in January. That was a comforting factor as the Fed ignores the headline figure (as does our Reserve Bank).
US industrial production jumped by a sharpish one per cent in February, compared to a fall of 0.3 per cent in January.
That was partly due to higher production of electricity by utility companies because of the very cold weather in much of February.
New York crude oil for April delivery fell 44 cents to settle at $US57.11 a barrel while April gold on Comex jumped $US6.80 to settle at $US53.90 an ounce: that was around $US3 an ounce higher over the previous week’s close.
Meanwhile the subprime situation received another warning from the highly-respected US bond specialist, Pacific Investment Management Co of Pimco, which warned at the weekend that the losses in the subprime sector will spread to other ‘aggressively written loans’.
Pimco is well known in the US for having first predicted the downturn in the US housing sector two years ago. It manages an estimated $US668 billion in bonds for a wide range of clients in the US and around the world.
It was quoted in US business media reports as warning that defaults could spread to borrowers with so-called “Alt-A” or jumbo mortgages, according to a report distributed to clients. (Alt-As are loans to borrowers with good credit scores who fail to meet other criteria for top-rated financing. Jumbo mortgages are loans of more than $US417,000)
“It is likely that the poor performance we have seen in subprime loans will carry over to some degree into the most aggressively underwritten loans in the Alt-A and possibly Jumbo prime markets,” Pimco was quoted as saying in the report. “We do not believe that prime loans will be materially affected.”
US investment bank, Bear Stearns said last week that so called Alt-As represent $US1.14 trillion in loans or 12 per cent of all mortgages, subprime accounts for 15.2 per cent or $US 1.45 trillion and jumbo mortgages $US1.41 trillion or 14.8 per cent. All up 42 per cent of total US mortgage outstandings. An estimated 55 per cent of US homeowners have a mortgage.
Alt-A loans made an estimated 20 per cent of mortgages issued last year in the US, according to another investment bank, Credit Suisse. Alt-A and jumbo mortgages can’t be included in bonds guaranteed by government-sponsored entities such as Fannie Mae or Freddie Mac.
Pimco forecast US median home prices will fall by 4 to 5 per cent this year. The median home price for existing homes was down 8.5 per cent in January from a peak of $US230,000 last July according to the National Association of Realtors.
Pimco was also quoted as saying “We believe that we are in the middle of a downturn, not at the end, and that the problems created by expensive housing, overstretched consumer finance and years of Fed tightening have yet to take their full toll on the US housing market”.
And that’s why it’s a problem that will grow for a while, but won’t go away from a deal longer, despite attempts by some investment bankers and others in the US and Australia to say it’s not a huge problem.
It is, but it won’t hit like a stockmarket slump, or with a ‘bang’; it will be series of smaller impacts each adding to the next until the bottom is found and the huge oversupply in new and existing houses is finally cleared because prices are at a level where more people can afford to buy and the subprime market starts growing again.
US analysts say that housing and related industries account for about 23 per cent of the US economy, including everything from hardware shops, to timber, to concrete, bricks, some parts of retailing (Wal-Mart), steel, oil and plastics. You name it, you need it when building, renovating or moving. That’s roughly $US2.5 trillion dollars a year in an economy with a GDP of over $US 11 trillion.
And where will any impact be located: California where an estimated 20 per cent or of all mortgages are subprime. In Florida it is around 10 per cent (good news for Rinker Group and its defence against Cemex of Mexico).
