Fears about the housing market are growing, writes Denis Stauntonin Washington.
Shaken by fears of a recession driven by falling house prices, Wall Street last week gasped with relief at news from the US National Association of Realtors that contracts to buy existing homes rose 0.7 per cent in February.
The tiny increase was an improvement on a 4.2 per cent month-on-month fall in January but it did little to obscure the big picture represented in the fact that the number of existing homes sold in February was 8.5 per cent lower than 12 months ago.
Fears about the US housing market were reinforced by the filing for bankruptcy of New Century Financial, one of America's biggest providers of "subprime" home loans to borrowers with poor credit histories. New Century's fall is part of a broader crisis in the subprime mortgage market, which has seen delinquencies and foreclosures soar.
Investors and economic analysts are worried that the subprime crisis will affect an already softening housing market in the US that is already having an impact on consumer spending as Americans stop dipping into their home equity to fund big purchases such as cars.
The rise and fall of the subprime market reflect a boom in home ownership over the last decade that started when the Clinton administration introduced a number of initiatives to make it easier for more people to get home loans.
Democrats and Republicans alike believed that home ownership was the best route to wealth accumulation for most citizens and studies showed that it also helped to reduce crime and increase civic engagement.
Mortgage firms introduced an array of new loan options, including low "teaser" interest rates that increased sharply after a few years, interest-only mortgages and 50-year repayment terms to reduce monthly payments.
Borrowers with poor credit histories were now able to secure mortgages for the first time and lenders found increasingly ingenious ways to make monthly payments appear more affordable. These included dispensing with escrow accounts that most conventional mortgages set up to collect money for property tax and home insurance premiums.
As long as house prices were climbing, few borrowers got into trouble and home ownership in the US increased from 65 per cent of the total population in 1996 to 69 per cent last year.
As house prices began to stagnate and in some parts of the country, to fall, more and more subprime borrowers had difficulty meeting monthly repayments and the current wave of foreclosures is forcing as many as 130,000 Americans from their homes each month.
All these repossessed homes are depressing prices in many parts of the US and Arizona, California, Florida and Nevada, the chief beneficiaries of the housing boom, are bracing for a harsh blow from the slump. From late 2005 to late 2006, existing home sales fell by 21 per cent in California, 27 per cent in Arizona, 31 per cent in Florida and 36 per cent in Nevada.
US unemployment fell to a five-year low of 4.4 per cent, suggesting that troubles in the housing market have yet to hit the broader economy but economists warn that the effect may only be delayed rather than averted. Real wages in the US have scarcely budged in recent years and consumer spending has been fuelled by home equity.
Car dealerships in Florida and California are already complaining about a fall-off in business and many are blaming the fact that 16 per cent of car buyers in Florida and 30 per cent in California finance their purchases by borrowing against their homes.
These worrying trends are appearing amid signs that the golden years of high economic growth and low inflation in the US may be coming to an end after almost a decade. Economic growth has fallen to about 2.3 per cent of GDP from 3.7 per cent the previous year but inflation remains stubbornly above 2 per cent and is trending upwards.
Part of the problem is a slowdown in productivity growth, which is close to a 10-year low. The weakness of the dollar against other currencies has pushed up the price of imports and any rise in fuel costs could drive inflation even higher.
The Federal Reserve has held back from cutting interest rates from their current level of 5.25 per cent, depriving America's beleaguered homeowners of a little relief in these anxious times.
