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House Price Outlook (4th March - 16th March 2008)

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This website is about the coming house price crash. But in order to understand the drivers for house prices going forward we first need to understand current economic conditions and anticipated future trends. Which Way Home provides a quick summary of these factors in the “Latest Market Outlook” section of the website. I hope you find it useful…

In the last Market Outlook I predicted that the news stream would remain unchanged and that the trend which has been documented in previous Outlooks would continue for the foreseeable future. As a result, this month I have categorised the news into specific sections, breaking the wider trend down into smaller components. I will populate these sections each month going forward.

Housing market woes due to high debt burdens, subsequent loan defaults, foreclosures and falling house prices…

Foreclosures hit record. The share of homes entering foreclosure rose to 0.83% of all mortgages in the fourth quarter of 2007 the Mortgage Bankers Association said. The delinquency rate (reflecting households which have failed to meet their mortgage payments) soared to 5.82%, the highest since 1985 while sub prime adjustable rate delinquencies hit 21.7%.

Leading to corporate hardship as credit evaporates…

Bear Stears shares crashed 47% on Friday 14th, falling 57% for the week to a 9.5 year low, stating its liquidity position had “deteriorated significantly”. America’s 5th largest investment bank had to seek emergency funding from the Fed, using JP Morgan as a conduit. The Fed also accepted all of the credit risk in the arrangement, sending a message to the financial world that unfettered risk taking is ok – the Fed will bail you out.

Citigroup said it would slash its mortgage holdings and lending activities.

Mortgage lender Thornburg Mortgage questioned its ability to stay afloat after it missed more than half a billion dollars in margin calls (it was not able to pay the money it owed). Thornburg shares dived 86% with other lenders also down hard.

A hedge fund managed by private equity giant Carlyle Capital also failed to meet $400m in margin calls, raising fears that creditors may seize its remaining $16bil in assets, which could virtually wipe out its capital.

Troubled bond insurer Ambac said it had raised $1.5 bil by selling stock and convertible bonds, a move designed to preserve its credit rating against a rising tide of claims from complex securities it had guaranteed.

As I stated in earlier Market Outlooks, I expect a number of large household financial institutions to fail over the coming years. Bear Stearns, Northern Rock, to name but two, are just the start of a long list of coming high profile failures.

Stock markets price in corporate woes and fall…

The stock market closed near its lows for the period after a string of volatile sessions on above average trading volume.

The latest rally attempt for both the S&P500 and the Nasdaq started on January 23rd, but the Nasdaq rally died on March 7th as the index undercut its January 23rd low. The fledgling S&P500 rally remains barely intact.

Remember that the trend for equities is very much down. There will be little good news of any significance for some time.

If you own shares, consider selling them to lock in your wealth and certainly don’t buy shares - you will just end up fighting to stay afloat.

Central Banks try to help, lowering interest rates and printing paper money…

As a result of the above, news came that the Fed believes it necessary to inject $200bil into the banking system over the next month to keep the financial system from being overwhelmed by a deepening credit crisis that appears to have pushed the U.S. economy into recession.

In a coordinated effort with other major central banks, on Tuesday 11th the Fed said it would raise this months special loan auction to $100bil and lend a further $100bil via swaps for assets such as mortgage debt (it will offer $200bil in highly liquid, saleable Treasury securities to financial institutions, taking low quality, undesirable mortgage-backed securities as collateral).

Traders now expect the fed to cut rates by 0.75% on March 18th.

Their currencies then fall…

The Dollar dived vs Euro and Yen. The Euro rose to a record 1.5668 against the Dollar on U.S. credit woes, the likelihood of further interest rate cuts in the U.S and indications that the European Central Bank wont cut rates. On Friday 14th the Dollar fell below 99 Yen for the first time in more than 12 years. The Dollar also hit parity with the Swiss Franc.

Commodities rise as the currencies fall in value…

Gold broke the $1000oz mark for the first time, reaching around $1015oz by the end of the period. As you know, my outlook for gold is up, up, up, but it will be important to see how metal traders react to the psychological $1000 level. If the price of gold continues to rise it may be a while before it stops to catch its breath.

Oil surged to new highs as April futures taunted the $113 level. The rise in the oil price was helped by the decline in the dollar over the period.

As the prices of goods rise, disposable income decreases which leads to bad debts, defaults, foreclosures and falling house prices…

According to the Fed, Americans were poorer at the end of 2007 than they were the year before. Higher prices, a bigger debt burden and sagging home prices are all contributing to an evaporation of wealth.

The worst job losses in 5 years were reported as U.S. employers shed 63,000 workers last month. And remember, as the job losses grow, so too will the number of bad debts and foreclosures, causing credit to evaporate further and making it financially difficult to buy a house. If it is financially difficult to buy a house and people are simultaneously worried about losing their jobs, we have all the ingredients we need for a huge house price crash.

Keep reading and keep updated.

Which Way Home

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