Larry Schlesinger | 13 March 2012

Falling US home sales puts more pressure on global recovery

More pressure has been placed on the US economic recovery and the global economy after new US homes sales fell by 2.2% to an annual seasonally adjusted rate of 307,000 units – the lowest level since 1963.

Economists polled by Reuters had been forecasting annualised sales of 320,000 units.

Patrick Newport from US-based research firm IHS Global Insight described 2011 as “the worst year on record for the new single-family home market”.

The poor result comes despite the US government’s efforts to stimulate the housing sector, with Federal Reserve chairman Ben Bernanke pledging to keep interest rates at a near zero rate until at least mid-2013.

At the same time US president Barack Obama is proposing a plan to help borrowers reduce their monthly mortgage payments by allowing those borrowers who own greatly devalued homes to refinance into cheaper mortgages.

Currently home owners who own houses that are valued at 32% below their 2006 peak are prevented from refinancing into cheaper mortgages.

In January 2006, the average 30-year fixed rate was 6.07%.

The current rate for 30-year fixed rate mortgages stand at 3.88% meaning refinancing into a cheaper loan would save borrowers around $3,000 per year.

Writing in Chanticleer, Tony Boyd describes the US housing crisis as the “cancer” at the heart of the US economy and says that on some measures it “is worse than it has ever been despite three years of central bank support for the economy”.

According to Boyd, Australian companies with significant operations in North America (including shopping centre group Westfield) and the rest of the world economy have a “vested interest in the US continuing its bizarre treatment of mortgage credit, which combines tax deductible interest payments, no capital gains tax and the ability to refinance fixed-rate loans at no penalty to the borrower whenever interest rates fall”.

Boyd says the practice of non-recourse lending in the US has encouraged a “no-responsibility” approach to home loans that peaked in the years leading up to the sub-prime mortgage crisis in 2008.

“The culture of not having to take responsibility for debts is inherently dangerous,” Body says.

“The results of all that are that America is now stuck with an inventory of about 1.6 million homes that have either been repossessed or are seriously delinquent. About 10% of total US consumer debt of $US11.66 trillion ($10.96?trillion) is in some stage of delinquency, according to the latest figures from the Federal Reserve Bank of New York.

“About two-thirds of the $US1.2 trillion in delinquent debt is more than 90 days overdue.

“Economic recovery was meant to boost housing activity, absorb the inventory and kick-start a lift in housing construction. But the years of low interest rates have not worked.”

 

 

 

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