PowerSwitch

http://www.telegraph.co.uk/money/main.j ... econ24.xml

Panic has begun to sweep the sub-prime mortgage sector in the United States after the bankruptcy of 22 lenders over the past two months, setting off mass liquidation of housing loans packaged as securities.

The rapid deterioration could not come at a worse time for British bank HSBC, which has set aside $10.5bn (?5.4bn) to cover bad loans in the US.

The cost of insuring against default on these loans has rocketed in recent weeks, from 50 basis points over Libor to 1,200, raising fears that a credit crunch could spread to the rest of the property market.

Low-grade BBB-rated securities - measured by the ABX index - have crashed from near par of 100 in early November to 72.5 this week.

Peter Schiff, head of Euro Pacific Capital, said the sector was in an unstoppable meltdown. "It's a self-perpetuating spiral: as sub-prime companies tighten lending they create even more defaults," he said.
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What do you think? Beginning of the financial quake? Or just a tremor?

I am totally convinced this is just about it...the news is gradually getting worse (well, gradually until the last couple of weeks and now it's coming thick and fast).

Every single indicator is pointing to a housing meltdown proper in the States. The sub-prime situation is now starting to become visible enough to grab CNN's main headlines 2 or 3 times in the last week. The issue is now that suddenly the lenders will tighten their lending practises in a big way so there are even less buyers. Confidence is close to falling off a cliff and then it's all the way to the bottom. And if interest rates go up as well it looks even worse.

Basically there's nothng good happenging now and the sticky-tape that's been holding the wheels on up until now is starting to look a bit tired.

Interesting article in the Economist this week called "Switching Engines" , it talks about how less of the worlds GDP growth is reliant on the American consumer.

It argues that the extra $500 billion a year (over the last 5 years) of the US current account deficit only represents 0.2% of global GDP.

It goes onto talk about how only 2.2% of the 11% per annum growth in the Chinese economy is export driven. This figure is forecast to drop to 1.6% in 2007 according to Goldman Sachs.

In other words, domestic consumption in countries like China are understated.

It does goes onto say though that the real test will be later this year when the negative wealth effects of the US housing market starts to be felt!! (which looks like gathering serious pace with the sub prime mortgage sector!)

The situation in the US is different because of the supply issue, the US can build anywhere in amounts that it wants, this is antitheses to the UK which have major supply problems. Also, the drivers for a crash in the UK are just not there i.e. high unemployment, high interest rates, and good supply/choice of properties. The so-called buy to lets are not really fuelling the UK market because as soon as they see some capital appreciation they sell up thus helping the supply problem.
I can see a slow down in house sales, a levelling off of prices maybe even a 10-20% drop in prices, but no crash. On an island of 60+ million a 3-bed house with good-sized garden will always be in demand.
I could be wrong!! I remember telling people in 1997 that house prices were vastly overvalued and to hold off buying one!

I agree it's a different set of situations in terms of supply here. But the point is that the most people will pay for something is the most they can get their hands on. If easy credit dries up as is looking like happening then house prices could well fall like a stone. You say the conditions for a collapse aren't there but give it time - inflation is here and it's being hidden at the moment. You only have to look at the rises in things like train tickets, council tax and anything that can't be imported. Real wages are being eroded and generally the world economy is doing an ever-more impressive high-wire act. At some point the wire's going to twang and things will start falling off. Might not be this year but I can't seeing going more than a couple of years before major pain is felt. I actually think it's starting now but obviously I could be very wide of the mark - many people have said it before and it's carried on!

I don't see any difference beween the USA and UK. Offshoring of jobs, leaving pressured corporate or low quality service jobs in a bubble economy.

Creation of excess money and credit always leads to inflation. Just like printing presses in Weimar or Harare. In the UK easy money has distorted house prices too, and just like in America until recently, resulted in equity withdrawal on home improvements, cars, holidays and refinancing / debt consolidation to keep the party going or creditors at bay. Nothing's been earned, it's all debt. When these borrowers, along with amateur speculators in the buy to let crowd, find they can't keep up higher interest payments (interest rates being raised to suppress inflation, because the BoE can't effectively control money supply) then the whole thing falls apart. I think that's already underway with the huge amount of debt distress out there already, and we're not in the recession yet. A high wire balancing act is about right.

As they go in the shredder, I've noticed that our weekly offers of credit have reduced from 110% of equity to 60% and now 50%. That still means we're good for about ?70k, must rush out and spend it all now.

Mean Mr Mustard wrote:I don't see any difference beween the USA and UK.

Indeed, and historically the UK housing market has followed the US market precisely.

stumuz wrote:The situation in the US is different because of the supply issue, the US can build anywhere in amounts that it wants, this is antitheses to the UK which have major supply problems.

They said the same about Japan in the 80's. Apparently they were wrong - house prices have gone down and down for over 20 years by now.

I am with you guys - the UK housing market is in a big bubble just like the US.

There is only direction for prices and that is down. With or without PO.

In the end - the trade deficit alone (due to end of the North Sea) will pressure rates upwards.

IMO , once we get beyond 7-8% interest rates - it will be painful recession time. Not good news for me as I work for a big DIY retailer!! LOL

If PO wasnt just around the corner, maybe the economy could of rebounded , and perhaps become more export led, with more expensive credit dampening demand for imports.

However - PO is with us, so what happens is anyones guess. But one thing is for sure - our standard of living is going down - I just pray we can hold it together as a society.

One question for you all though - what will be the major export countries view of the consumer nations debt?

What I mean is , they are relying on our careless borrowing in the west for their growth.

When the UK and US go 'pop', so does Chindia. I wouldnt want 2.5 billion starving unemployed people turning revolutionary on my government !!

Perhaps - there will be another review of the financial system?

After all , the Chinese have actively been preventing the global trade imbalances from correcting (ie keeping the Yuan down in value).

In effect they have been financing our binge , full well knowing that the longer they leave it, the more painful the withdrawel of all the demand when it finally goes....

It could all be a cunning plan by the Chinese to enslave us for the next 50 years. If it is they're doing a good job If they aren't we're doing our best to set everything up for them.

China are actively trying to promote internal consumption (isn't that great for the planet) so they they are less export dependent when things do go pop. Difficult to tell with them as they don't have the same 'democtatic' pressures of western governments. They have a big army ready to protect themselves from themselves if needed!

http://www.marketoracle.co.uk/Article401.html

25/02/07 - 19.24pm .... By: Nadeem Walayat

UK House Prices continue to Rise whilst the US Housing Market Slumps

The UK housing market has proved remarkably resilient by notching up a further gain for January of 1.3% (Halifax) , whilst the US Housing market continues to go from bad to worse as the sub prime mortgages time bomb goes off, resulting in a slump that looks set to be the worst since the Great Depression of the 1930's.

The key to the strength of the UK housing market has been the fact that UK house prices have yet to reach the excesses of the early 1990's, in terms of House Price to Earnings to Interest rates ratio. Traditionally, average earnings and house prices have been taken together to produce an affordability ratio, this ratio has clearly in recent years shown itself to be flawed, as UK house prices have not fallen, because this measure has ignored historically low interest rates as a function of earnings and house prices, and therefore a more accurate indicator needs to include interest rates................

Let's hope Nadeem is right.

I've read that 2nd paragraph a few times and it still doesn't make sense to me!

The US is different right now for a few reasons. Their interest rates were a lot lower than ours and went up faster so overshoot happened. As you mentioned earlier there is a huge over-supply - house builders went mad and now they're in trouble.

We are a few interest rate rises away from serious problems whichever way you look. As Mr M mentioned eariler, you can't create money for nothing without devaluing it and giving inflation a start and then needing to raise interest rates.

The top graph is the percentage of income going to a mortgage payments in the US and the bottom one is the UK house prices. Scarily similar...the pink bits on the top one are US recessions.

My guess is that both graphs might look a bit like the third picture some time soon

China needs us, we need China .... it's all a big closed system.

Why would any of the players want to smash the system?

China certainly can't stand alone - and why would they want to anyway?

More likely each player will try to optimise their position come times of trouble.

Some countries may suffer, some may benefit ... but the system itself will run and run.

Cheeky or greedy players however might sulk a bit when they find that they can't get all they want!

Local problems such as inflation and house price collapse will simply have to be lived with.

Nouriel Roubini, economics professor at New York University, says the housing bust is slowly pulling America into recession. He cites a 14.4pc drop in housing starts last month; an expected loss of 600,000 real estate jobs in 2007; a sharp fall in home equity withdrawals - down from 6pc of GDP at the top of the boom; and a squeeze as $1,000bn of mortgages are adjusted upwards this year to higher interest rates.

Mr Roubini said: "America faces a 'reverse cycle' where a credit crunch has hit before the slowdown, a rare pattern. Normally, recession comes first, setting off credit troubles in its wake. We have a housing recession, an auto recession, a manufacturing recession, and a real investment recession already present. If all this happening in what the consensus terms as a 'Goldilocks economy', what would happen if the economy slows down?"

So much for the American Dream. Looks like it's turning into the American Nightmare for a lot of people. I feel for the folks at the bottom of the pile but I've got no sympathy for the money lenders. I mean, what do they expect, when the lend to people who cannot pay?