Rarely has the attention of the world’s financial markets been more keenly focused on housing than at present. The credit crisis is persisting and has returned to the front pages with the collapse and rescue of Bear Stearns by J P Morgan, with the backing of the Federal Reserve.
I had hoped that the light at the end of the tunnel would be rather more visible by now but even Britain’s Treasury, which has a vested interest in the effects of the crisis being short-lived, does not think things will be back to normal before the middle of next year.
Rightly or wrongly, the ultimate solution to the crisis is seen by analysts to lie with the stabilisation and eventual recovery of the US housing market. Rightly, because that is where the sub-prime problem started, from which all the other problems flowed. Wrongly, say some, because what started as a housing market problem has now spread into other asset-backed markets and other sectors of the economy. The consensus among economists, after all, is that what started as a US housing recession is now a general economic recession.
Nevertheless, housing stability is a necessary condition for the return to normality, even though on its own it may not be sufficient. This was why news of an apparent bottoming out of US housing market activity in February was greeted with such enthusiasm in financial markets.
Against expectations of a further fall, sales of existing homes rose by 2.9% to an annualised rate of 5.03 million, up from 4.89 million in January. The figures are seasonally adjusted and did not appear to reflect any significant weather distortions.
The small rebound in sales of existing homes followed tentative signs of stability in sales of new homes. It represented, according to Paul Ashworth of Capital Economics, “a rare ray of hope from the US housing market”.
Sales of single-family homes were at their best level since July last year. There was even a fall in the stock of unsold homes on the market. That, however, merely served as a reminder of how far there is still to go. Even after the fall in stock levels there is still an average of 9.6 months’ supply – down from 10.2 but still very large.
Working off this overhang is going to take a considerable time, during which the downward pressures on prices will persist.
Even after their rise in February, home sales were nearly 24% lower than a year earlier. The median home price in February was 8.2% down on a year earlier, the biggest 12-month fall since the National Association of Realtors began collecting the data in 1968.
The best efforts of the US Treasury and the Federal Reserve are now being directed at first stabilising then generating a modest recovery in the housing market and the wider economy.
The Bush tax cut – worth around $150bn, two-thirds of it in tax rebates to individuals – will come through in the summer. The question is whether it will be big enough to offset the adverse effects of mortgage re-sets.
Hank Paulson, the US treasury secretary, is working with the banks in both fire-fighting the crisis in financial markets and ensuring they do not make a bad situation worse by turfing out recalcitrant borrowers too readily from their homes.
The Fed, for its part, has driven through aggressive rate cuts all the way down to 2.25%, with more expected, and has stepped up its provision of liquidity against a range of assets, including mortgages and mortgage-backed securities. In America it really is all hands to the pumps. It might work but it will take time.
In the UK the challenge is to stop us getting into a US-style situation in the first place. You would have to say that there does not appear to be a huge sense of urgency in official circles about this.
Having promised to put housing fi-nance at the centre of his Budget, Alistair Darling played for time. So there will be consultation over the summer on a “market-led” solution to the problems in the mortgage market. There will also be consultation on getting borrowers to switch to long-term, 25-year, fixed-rate mortgages. There was no action on stamp duty, even though lenders urged a doubling of the threshold to £250,000. But the Treasury, to be fair, had given no ink-ling a move was likely. There was a small stamp duty concession for shared ownership schemes.
As for the Bank of England, some would say it has also moved rather glacially, with just two rate cuts at time of writing, although there is more on the way.
Even so, Mervyn King has been keen to emphasise that the Bank is more constrained by its inflation objective than the Fed. The message is that there will be no ultra-aggressive Fed-style rate cuts here.
That is a reasonably sensible position to take, and my expectation remains for a base rate of 4.75% by the end of the year.
Do not forget, however, that the Fed started very cautiously last autumn, until the fast-deteriorating situation took over. Britain’s housing market is weak but fairly stable. We have to hope that the stability, if not the weakness, lasts.