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House Price Outlook (1st April – 4th May 2008)

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This Month's House Price Crash Developments

> S&P/Case Shiller reported U.S. home prices down 15% from their peak last year.
> National Association of Realtors reported U.S. house and condo prices down 7.7%.
> Prices of new U.S. homes have fallen 13.3% this year, the biggest decline in 38 years.
> Sales of new U.S. homes are down 36.6% versus last year and 62% from the peak in July 2005.
> Sales of existing homes sunk 19.3% in the past year with a 9.9-month supply on the market.
> RealtyTrac reported that foreclosures are up 112% in last year and 23% during the first quarter.
> Nationwide reported U.K. house prices down 1.1% in April and down 4% from last year's peak.
> Halifax reported U.K. house prices down 2.5% in March, the smallest annual growth in 12 years.
> Hometrack reported U.K. house prices fell 0.6% in April, for a decline of 0.9% year-on-year.

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Which Way Home Focus on: Protecting yourself with gold >
News Review >

Which Way Home Focus on: Protecting yourself with gold...

In each newsletter I pick a key topic to focus on. This week, how to protect yourself from the impact of the house price crash by owning gold.

There have been certain times in history when owning gold has made perfect sense. This is one of them. There are three key reasons why gold is the best investment you can currently make. Firstly is the vulnerability of the dollar, which is the world’s reserve currency. The U.S has amassed huge debts over the last 30 years, which now stand at over $9 trillion. In addition, the US currently consumes around 6% more than it produces each year so that debt keeps growing. If foreigners become uncomfortable with the safety and the value of the dollar, we may see some significant USD positions being unwound, leading to its ultimate collapse. As reported below, the Dollar index has already fallen 37% from its peak in 2002, and the pace of the fall shows no signs of abating. This has profound implications for future financial stability, the effects of which can be offset by owning a consistent store of value – gold.

Secondly, as the dollar and other major currencies fall in value the price of goods and services continues to rise. We are all familiar with rising prices at the gas pump and in the supermarkets, driven by rampant inflation – that is the fall in the value of our currencies. Gold acts as a hedge against inflation, maintaining its value against other real assets like food and oil. Compared to gold, the price of oil has remained stable for decades, it has just risen when priced in paper currencies, which are falling in value by the day. In a similar way, gold also protects the value of your savings as the paper money you hold in your savings accounts loses its value.

Finally, when compared to alternative investments gold shows huge potential to outperform. True inflation, which is the fall in the value of money, is around 15% per year. Ignore govenrment based statistics which show it at 2-3%, you will know from your own shopping experience that prices are up more like 10-15 per year. As a result, savings accounts, bonds, dividends which provide around 2-5% income per annum are actually losing you 10-13% of your money each year. Conversely, measured against the dollar, gold has risen 166% over the last 5 years and 121% versus the pound. Yet there are still more gains to come.

Looking at the size of the gold market – there are around 159,000 tonnes of above-ground gold in existence, which at today’s prices is around $4.5 trillion. That is the same sort of value which trades in a few hours on the New York Stock Exchange or a tiny fraction of the $500 trillion or so global derivatives market. So if investors begin to take notice of gold’s potential and begin to buy, demand could potentially rocket, sending the price through the roof.

You can buy gold safely and easily online with BullionVault by clicking the advert below, or if you would like to read more, visit WhichWayHome’s guide to gold here.

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News Review

In this next section I relate current news headlines to the trends we see emerging in the housing market and in other key financial markets. It has been a busy period for news, and this month's summary is well worth a review. Happy reading…

High debt burdens lead to loan defaults, foreclosures and falling house prices…

The S&P/Case-Shiller index which measures home prices in 20 major U.S. metro areas dropped 12.7% in February from a year earlier, the sharpest decline in the data's two-decade history.

Despite U.S. home builders slashing prices by a record amount, sales of new homes plunged 8.5% in March to an annual rate of 526,000, a 17-year low. Median sales prices for new homes have fallen 13.3% in the past year to $227,600, the biggest decline in 38 years. Average sales prices are down 11.3% to $292,200, the biggest drop since the record book begins in 1963. The report from the Commerce Department stated that new-home sales are down 36.6% compared with a year ago and are down 62% from the peak in July 2005. February's sales pace was revised lower to 575,000 from 590,000. Sales fell in all four regions, dropping 19.4% in the Northeast to a 27-year low, falling 12.9% in the West to a 17-year low, falling 12.5% in the Midwest to a 27-year low, and slipping 4.6% in the South to a 12-year low.

The National Association of Realtors reported that resales of U.S. homes and condos dropped 2% to a seasonally adjusted annualized rate of 4.93 million from 5.03 million in February. Resales have sunk 19.3% in the past year. Inventories of homes for sale rose 1% to 4.06 million, representing a 9.9-month supply at the March sales pace. The median sales price fell 7.7% in the past year to $207,000.

New construction of U.S. houses plunged to the lowest level in 17 years in March, the Commerce Department estimated. Starts fell 11.9% in March to a seasonally adjusted 947,000 annualized units, the lowest level of starts since March 1991. Starts are now down 36.5% year-on-year. Starts of new single-family homes fell by 5.7% to 680,000 in March, while starts of large apartment units fell 24.6% to 267,000. Building permits, a leading indicator of housing construction, fell 5.8% to a seasonally adjusted annual rate of 927,000. This is the lowest level of permits since April 1991.

Pending sales of previously owned U.S. homes fell to a record low. The National Association of Realtors' Pending Home Sales Index, based on sales contracts signed in February, dropped a bigger than expected 1.9 percent to 84.6 from January.

The US Commerce Department reported that a record number of homes now sit empty, and the number of vacant homes for sale also hit a new high.

Separately, the Census Bureau reported that the share of homes vacant which are for sale, an important measure of the nation's housing supply, rose to a record 2.2 million in the first quarter of 2008, representing 2.9% of housing stock. The vacancy rate has jumped nationwide and in cities, suburbs and rural areas since the housing bubble popped. From 1995 until the fourth quarter of 2005, the rate held between 1.5% and 2%.

RealtyTrac reported that foreclosures are up 112% in last year, surging 23% during the first quarter. 90% of major cities saw increased foreclosure activity with cities in California and Florida leading the way.

In the UK, Nationwide reported that house prices have tumbled for the sixth month running. The lender said the average house price in April fell by 1.1% leaving the house prices down by 1% compared to last year. This is the first year-on-year fall in prices recorded since March 1996 and brings the average house price to £178,555.

The UK’s biggest lender, Halifax, said house prices fell 2.5% in March - the biggest monthly fall since the 1990s house price crash. According to Halifax, house prices are now just 1.1% higher than they were a year ago, the slowest rate of annual growth for 12 years.

Property valuation firm Hometrack reported that UK house prices fell 0.6% in April, declining for the seventh month in a row. The monthly fall resulted in an annual decline of 0.9%. The survey found that sellers are receiving around 93% of asking prices.

UK house prices will be further pressured by the disappearance of easy credit. First-time buyers with no cash savings were shut out of the housing market in April after Abbey became the last mainstream lender to stop offering 100% mortgages. Lenders ar now demanding minimum deposits of 5-10%.

Banks curb lending, individuals and corporations suffer as credit evaporates…

Debt write-downs and associated losses continued this month. Some of the major banks also launched fund raising drives to shore up their sub-par liquidity positions.

UBS suffered a $12.1 billion loss in the first quarter of the year following $19 billion of write downs. It has so far written down a total of $37 billion since the credit bubble popped and is now trying to raise $15.1 billion in capital to improve its liquidity position. UBS’s long-time chairman, Marcel Ospel, resigned after months of criticism from shareholders.

Germany’s biggest bank, Deutsche Bank, said Tuesday that it would take a $4 billion write-down because of the subprime crisis, and warned that market conditions “have become significantly more challenging during the last few weeks.”

Merrill Lynch also posted big writedowns. Merrill reported its third straight quarterly loss and said it planned to cut 2,900 more jobs after recording more than $6.5 billion in write-downs on subprime mortgages and other risky assets.

Citigroup posted its second straight quarterly loss following more than $16 billion of write-downs and costs related to credit losses. It said it will cut another 9,000 jobs. During April it tapped the capital markets twice in nine days, launching a $3bn equity offering aimed at bolstering its balance sheet just a week after issuing of $6bn in preferred shares.

Lehman shares rose after it raised $4 billion in new capital alleviating its own liquidity fears.

Washington Mutual, the largest savings and loan group in the US, reported that it would will get a $7 billion cash infusion from investors to boost its capital and cover losses arising from its subprime mortgages.

Wachovia, the fourth-largest US bank by assets, warned that the nation’s economy was deteriorating more rapidly than expected as it revealed plans to raise $7bn in capital after a surprising first-quarter loss.

Royal bank of Scotland revealed $11.7 billion loss relating to losses on US mortgages and unveiled plans to raise £12 billion ($23.7 billion) through the sale of shares to existing investors in attempt to bolster shaky capital position. It will be the biggest rights issue ever made by a UK company.

The UK’s biggest lender, HBOS, also announced a rights issue aimed at raising £4bn. The firm said the initiative had been established against the backdrop of continued volatility in the financial markets, and a more challenging UK macroeconomic environment. HBOS wrote-off around £2.8bn of the value of its investments.

There were also clear signs that the popping of the credit bubble is impacting U.K. homeowners, and in turn house prices. Gross lending by building societies fell £1.808bn to £3.631bn in March 2008 compared to £5.439bn in March 2007.

There was some good news for gullible people as the largest and most well-known U.K. buy-to-let investment seminar operator became the latest victim to the housing slump. Inside Track Seminars, which promoted property schemes, called in its administrator, citing challenging conditions following the credit crisis. I have received many brochures from Inside Track over the years, offering me the chance to attend their conferences and learn the secret to untold riches by investing in property through their schemes. Their material always painted an extremely rosy picture of property investment which could never be achieved in reality. Indirectly, their failure has saved prospective customers from wasting thousands of pounds of their hard earned money on property pipe dreams.

Stock markets price in corporate woes and fall…

The S&P500 and Nasdaq both made an excellent start to the period, rising 3.5% and 3.7% on volume 17% and 25% higher than the previous day, respectively. The fledgling rally which commenced on 17th March remained intact throughout April with some leading stocks breaking out to higher ground from established bases. For the month the S&P500 ran up 7% and the Nasdaq 9% as investors gambled that the worst of the credit crisis is behind us. Unfortunately this is not the case and the current rally is taking place within a wider context of severe housing market troubles, credit troubles, debt write downs and weakening consumer sentiment. As noted last month, this rally is not a rally to chase and you are better off keeping your money on the sidelines for the medium term. The same applies to the UK stock market.

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Central Banks try to help, lowering interest rates and pumping out money…

On April 10th the Bank of England cut its key interest rate by a 0.25%, to 5%, the third 0.25% cut since December. On 22nd the Bank of Canada said it is lowering its target for the overnight rate by 0.5% to 3%.

On 30th the US Federal Reserve cut rates for fourth time this year, by 0.25% to 2%. Rates have now been cut 3.25% in 7 months. It hinted that the move could be the last in a series meant to buffer the economy from a credit crunch and housing downturn. March 18 Fed meeting minutes said some policy makers feared a “prolonged” slump.

The European Central Bank left its key lending rate on hold at 4% in April, as did Japan, holding its key interest rate unchanged at 0.5%.

We also saw central banks continue to pump liquidity into the financial system. The Bank of England said it would allow banks to swap mortgage-backed securities valued at about $100 billion for government bonds in an effort to restore calm to the British financial markets. "The Bank of England's Special Liquidity Scheme is designed to improve the liquidity position of the banking system and raise confidence in financial markets while ensuring that the risk of losses on the loans they have made remains with the banks," Mervyn King, the central bank governor, said in the statement.

The negative side effects of such moves are beginning to emerge however. Standard & Poor's, the credit rating agency, said that the US government's need to provide financial backing to the state-sponsored mortgage financiers that dominate the US housing market could pose a risk to the country's triple-A credit rating. In the event of a deep and prolonged US recession, S&P said the potential costs of propping up government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac, which have implicit government backing, could cost the US government up to 10 per cent of GDP.

Their currencies fall in value as a result…

The dollar rose slightly for the month, touching a 5 week high against the euro and a 10 week intraday high against the yen. Though the dollar may have risen against other national currencies, all of them were sinking against real things. Rising commodity prices have been one of the strongest indications that the flight out of the dollar into tangible assets is a real phenomenon, highlighting that the recent dollar 'strength' is illusory. Remember that the Dollar Index, which compares the dollar to a selection of international currencies, has fallen 37% from its peak in 2002. It will continue to fall for the foreseeable future.

Commodities rise as currencies fall in value…

Oil surged all month long, touching $120 a barrel before closing April at around $116. In the U.S. retail gasoline prices hit $3.50 a gallon for the first time putting increased pressure on American disposable income. There is now talk of oil surpassing $200 a barrel in the years ahead, which seems perfectly logical to me. As readers will know, we are in a long term commodity bull market, which is being exaggerated by the weakening of our major currencies. I don’t think it will be too long before we breach the $200 level, although it may be a bumpy ride getting there.

Gold rose in the first half of the month before relinquishing its gains to close the period at its 200 day moving average. We should see some support at this level. Whether it will move up strongly from here or will continue to consolidate is yet to be seen. For now, be patient!

Silver mirrored gold, but still remains above 200 day moving average. I would expect that it will fall to touch that average at some point, so there may be some further downside relative to gold.

As the prices of goods rise, disposable incomes decrease leading to more bad debts, loan defaults, foreclosures and falling house prices…

During the month consumer confidence hit new long-term or record lows.

More U.S. jobs were lost as payrolls tumbled 80,000, the worst drop in 5 years. Taken together with downward revisions to Jan and Feb payrolls, the U.S. lost 232,000 jobs in the first quarter of 2008. The jobless rate spiked to 5.1%.

In the U.K. Royal Bank of Scotland began the integration of ABN Amro’s investment bank into its global markets division. The move is likely to trigger the loss of about 7,000 jobs or about 25% of the combined 28,000 workforce.

Inflationary pressures continued to rise in the U.S. March consumer prices rose 0.3%, core inflation rose 2.4% and producer prices jumped 1.1%, 6.9% higher than last year. Core wholesale inflation hit 2.7%, the highest in 3 years.

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