Wednesday, 27 June 2007

US housing market remains weak but keeps hope for Fed cut alive

While the consensus estimate is for the US economy to show a substantial rebound in the current quarter, yesterday's data show that the condition of the economy remains fragile. From Bloomberg:

The New York-based Conference Board's index of consumer confidence fell to 103.9 in June from a revised 108.5 the prior month. Purchases of new homes fell 1.6 percent last month to an annual pace of 915,000, the Commerce Department reported in Washington, and housing prices in 20 cities in April fell by the most in at least six years, according to S&P/Case-Shiller.

The weakness in new homes sales corroborate the weakness in other housing indicators such as existing home sales, the NAHB/Wells Fargo Housing Market Index and housing starts.

And things could get worse. In his latest commentary, PIMCO's Bill Gross warns:

... A recent research piece by Bank of America estimates that approximately $500 billion of adjustable rate mortgages are scheduled to reset skyward in 2007 by an average of over 200 basis points. 2008 holds even more surprises with nearly $700 billion ARMS subject to reset, nearly ¾ of which are subprimes.

That could lead to more delinquencies and defaults and lower home prices. Other areas of the economy could be affected.

... Consumption will be reduced to say nothing of new home construction over the next 12-18 months... Importantly, as well, and this point is neglected by most pundits, the willingness to extend credit in other areas – high yield, bank loans, and even certain segments of the AAA asset-backed commercial paper market should feel the cooling Arctic winds of a liquidity constriction.

Chilling thought indeed. But there is a silver lining: PIMCO expects "the Fed to issue an insurance policy in the form of lower Fed Funds at some point over the next 6 months".

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