US housing market in freefall dive By Ambrose Evans-Pritchard Last Updated: 9:42pm BST 28/09/2007
Sign of the times: a foreclosure sign outside a house in Miami, Florida, this week
Sales of new homes in the US plunged in August at the fastest rate since modern records began, prompting fears the economy is sliding into a full-blown recession.
Total sales dropped 8.3pc on the month and are now down 21.2pc during the past year, a sign that the credit crunch has cut off mortgage funding for large numbers of people. JP Morgan now expects sales to fall by more than half from their peak before touching bottom well into next year.
Median house prices fell 7.5pc to $225,700 (£111,400) as distressed builders tried to clear the glut of homes. Prices are down 14pc from their peak in March. The dire figures came amid further signs of distress in the global credit markets. The Federal Reserve said the outstanding volume of commercial paper fell again last week, despite the emergency half-point cut in rates. The commercial paper market has now fallen by $368bn during the past seven weeks, or 17pc, indicating that lenders are still unwilling to roll over short-term loans.
In Frankfurt, the European Central Bank yesterday lent €3.9bn at its 5pc penalty rate, the highest volume of lending at this window in three years.
There was widespread speculation on trading floors that a Spanish bank with exposure to the country's housing bubble was running into trouble. The need for any lender to raise money on this scale at such a cost suggests that the eurozone's interbank system is still under stress.
"We're still a long way from resolving this whole crisis," said Robert McAdie, head of credit at Barclays Capital. "Banks are not willing to lend to each other beyond a week. The current situation is more systemic than the crisis in 1998. It effects far more institutions and will have a much greater impact on the global economy."
He said the relief rally in stock markets since the Fed slashed rates would come face to face with reality soon enough. "The equity markets are pricing in a 'Bernanke Put'. They are betting that the Fed will cut again and again, but they not factoring in the effect that this credit squeeze is having on the financial system," he said. "Cheap money is now history. There are not going to be any more of the big leveraged buy-out deals for a long time because the CLO [collateralised loan obligations] market that financed them is effectively closed," he said.
The Bank of Montreal, Canada's fourth largest lender, revealed yesterday that it had been unable to roll over some of its asset-backed commercial paper. The bank has put aside $42.7bn in back-up liquidity lines to cover its conduits, the investment vehicles used by banks that are kept off balance sheets.
Meanwhile, Fitch Ratings warned in a report that a large number of countries faced "systemic stress" after letting rip on credit, which expanded at 13pc worldwide last year. "Fragilities that have built up but been masked by rapid credit growth are likely to be exposed as credit growth slows from now on," said Richard Fox, the group's director.
Bernard Connolly, global strategist at Banque AIG, said the commercial paper market was splitting in two, with conduits shut out of the market. Fire sales of assets have not yet begun, so the real value of the distressed assets remains unclear. "Even if the liquidity crisis is easing, the credit crisis has hardly begun," he said.
A group of Canadian banks are trying to thrash out a $35bn rescue deal to help restore order to the country's commercial paper market, which seized up in August after the financial group Coventree failed to roll over $4.8bn – leaving a long list of investors starved of funds.
Marcus Schuler, credit chief at Deutsche Bank, said the Fed rate cut had restored parts of the debt market to normal, at least for now. "There have been no catastrophic losses announced. New issuance is picking again and cash is there," he said.
Mr Schuler said the spreads on the iTraxx Crossover index measuring appetite for corporate bonds had fallen sharply after ballooning to record levels during the summer panic. "We've regained three quarters," he said.
