Another dead cat bounce for shares and commodities after the $US2 a share bid from JP Morgan for stricken Bear Stearns was raised to $US10 a share and sales of existing homes in the US rose in February for the first time since last July.
But prices fell more than 8% in February from the same month in 2007 to take the median price of an existing US home under $200,000: the biggest fall in 40 years.
But Wall Street fixated on the 2.9% rise in new sales reported by the National Association of Realtors to a 5.03 million-unit annual rate. That was contrary to expectations on Wall Street for a fall.
The Dow, S&P 500 and Nasdaq all jumped strongly: US Government interest rates rose sharply as investors sold T-notes and bonds and some commodity prices rose (such as oil, wheat and copper). Gold though was easier.
The rise in sales broke a six-month stretch of declining sales, but prices continued to fall and the Association said median prices fell 8.2% from February last year to $US195,900.
That was the biggest year-on-year drop on record dating back to 1968 and a sign of the real problem for the US economy and financial markets: the continued destruction of value and equity in housing..
It’s the continued fall in house price sthat has flowed from the rising level of mortgage defaults and foreclosures that is triggering problems elsewhere in the US economy and financial system
The fall in prices was led by an 8.7% drop in the median price for single-family homes. Sales of single-family homes increased 2.8% and sales of apartments, townhouses etc climbed 3.7%.
Sales rose in three of four regions, led by an 11% jump in the Northeast, which has not been hit as much by the crisis as the southwest and west have. .
The number of unsold homes sale at the end of February fell to 4 million, which represents 9.6 months’ backlog, compared with 10.2 months in January. This remains a major negative for future sales and price trends.
Economists say the falling price of homes looks to have helped boost sales, but there’s usually a low level of activity anyway in February and they would prefer to wait until April and May (the northern spring) to see what happens in the normal big selling months.
Meanwhile there’s debate that the US Fed has helped influence market activity by using its credit line support for the JP Morgan bid for Bear Stearns.
There were reports of other bidders in the wings but they never revealed themselves. no one wanted to go near Bear Stearns, except JP Morgan, with the backing of the Fed.
JPMorgan raised its offer for Bear Stearns to $US10 a share and struck a deal to buy nearly 40% of the bank, which almost certainly meant the deal would happen.
Under the revised terms of the deal, JPMorgan will buy 95 million newly issued Bear Stearns shares, and Bear’s board agreed to vote in favor of the offer. With those shares, JPMorgan would own 39.5% of Bear Stearns and have secured the backing of Bear Chairman Jimmy Cayne, owner of a 3% stake in Bear.
The new offer valued Bear Stearns at about $US2.1 billion, compared with $US236 million under the original deal: the new deal will help placate Bear staff who own around one third of the bank: they will share on $US700 million instead of $US79 million.
And, JPMorgan will have to cover the first $US1 billion in losses stemming from Bear Stearns’ less liquid assets, and will provide $US6 billion to cover severance, litigation and other transaction-related costs.
The new deal has financial backing from the Fed which will organise the remaining $US29 billion of support into a stand alone company to be managed by another company. That company will hold $US30 billion of Bears’ least liquid assets.
But the redrafted terms has raised concerns that US government is prepared to help rescue a failing Wall Street bank while declining to bail out millions of home owners facing the possibility of foreclosure.
