by Alexander G Rubio
Tue Aug 23rd, 2005 at 02:40:05 PM EST
When the stock markets crashed following the great Dot.com mania of the late 90s, a corrective downturn was headed off at the pass by US Federal Reserve Chairman
Alan Greenspan. The markets were flooded with liquidity and interest rates driven down to levels well below the rate of inflation. Suddenly it paid to borrow money. As a result there was a boom in the primary loan based asset, housing.
New mortgages were issued with ever less collateral or money down needed. Old mortgages were refinanced from old fixed rate loans to new adjustable rate mortgages, yielding lower monthly payments while the house owner could "take out" some of the now rising value of his home as spending money to buy that home entertainment system made in China. And so the loose money from the Fed. flowed like a mighty river through the economy, overflowing borders and creating new bubbles as it went all through the industrialised world.
Of course all good things must come to an end. Housing prices can't shoot up in excess of wage growth for very long before it is out of reach for most people, no matter the terms at the bank. Two other Anglo-Saxon economies, the UK and Australia, have already seen some of the air leak from their housing markets as personal debt has climbed to unsustainable levels. And now there are signs that even the US market may have topped out.
Sales of existing U.S. homes dropped 2.6 percent in July as the pace of both condominium and single-family home purchases slowed across nearly the entire country, a trade group said on Tuesday.
Previously owned home sales fell to a seasonally adjusted 7.16 million unit annual rate last month from June's record, which was revised up to a 7.35 million unit pace, the National Association of Realtors said. That figure includes both single-family homes and condos.
Analysts had expected overall sales to decrease to a 7.25 million unit annual pace.
"There seems to be some air coming out of some of these balloons," said David Lereah, the Realtors' chief economist.
And while these numbers were north of what many expected, there is now a marked
build-up of inventory.
The supply of homes available for sale increased to 4.6 months' worth in July, the highest since November 2003, from 4.4 months' worth the previous month.
``We are starting to see more houses coming into the market,'' and that is a sign of a turn, Harris said. ``First you see inventories rising, then you see a flattening of prices and then you start to see people have difficulty selling houses because buyers have more options and they get more demanding.''
A total of 2.75 million homes were for sale last month, the most since May 1988.
(...)
A 40 percent decline in prices after inflation is ``a reasonable projection for many places in the United States going forward,'' said Robert Shiller, a professor at Yale University, in an interview yesterday. ``The idea that home prices are just going to keep going up is just at odds with all historical evidence.''
Shiller said that housing has undergone the biggest speculative boom in U.S. history in the second edition of his 2000 book, ``Irrational Exuberance,'' that predicted the stock market would collapse.
Of course while this would be terrible news for people who bought into the market just lately, and would have repercussions on the wider economy, it would mean that a new generation, who never could get on the merry-go-round and never could raise the capital needed to become homeowners at today's prices, might have their chance soon.
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