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House Price Outlook (11 August – 14 September 2008)

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This Month's House Price Crash Developments

> Nationwide: UK house prices fell 2.8% in August, down 12% (£21k) from their peak of £186k.
> HBOS: UK house prices fell 1.8% in August, down 13% (£25k) from their peak of £200k.
> Rightmove: home asking prices fell £5,403 (2.3%) in August to £230k.
> Hometrack: house prices fell 0.9% in August with London leading the way with a fall of 1.1%.
> Gordon Brown has axed stamp duty on house purchases below £175,000 for one year.
> Hometrack: on average buyers ended up paying only 90.7% of the asking price in August.
> Bank of England: mortgage approvals have fallen 71% for the year to lowest level since 1993.
> Mortgage arrears have risen sharply and the number of repossessed homes has doubled.
> RICS: the number of house sales is at its lowest level since records began.
> CML: First-time buyers need bigger deposit to buy a home than at any time since 1980.
> The average price of a house sold at auction plunged by 23% in the year to August.
> Home repossessions have soared 24% to 15-year high.
> RICS: UK homes for rent exceed demand as flood of rental properties comes onto market.
> Home extensions made easier after change to planning laws.

> US regulators seized mortgage giants Fannie Mae & Freddie Mac with $5 trillion of mortgages.
> Fourth largest US investment bank Lehman Brothers collapses, files for bankruptcy protection.
> Investment bank Merrill Lynch agreed to be bought by Bank of America after emergency talks.
> Insurance giant AIG asked Fed for $40bn loan, in rescue talks with Warren Buffett.
> Biggest US savings & loan, Washington Mutual, hit on concerns it could fail imminently.
> S&P/Case Shiller reported US home prices down 0.5% in June, 18.8% off their peak.
> Commerce Dept: sales price of new homes down 6.3% to $231k compared with July 2007.
> National Association of Realtors: Metro-area home prices continue to slide.
> US pending home sales index falls 3.2% in July.
> Single-family housing permits fall to 26-year low, housing starts plunge 11%.
> Resales of US single-family homes & condos rose in July but inventories increased to record.
> Homes in foreclosure process set another record at 2.75% of all mortgage loans.

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Section Index

Overview: A Truly Fascinating Month >
House Prices & Housing Market Review >
The Month's Big Developments >
What am I Buying? >
Looking Ahead >

A Truly Fascinating Month

Oh my goodness, what a month! Looking back, I can’t think of a more fascinating, varied, volatile, controversial month in the financial and housing markets….ever! As a result I have produced the outlook in a slightly different format this month.

In both the UK and the US house prices continued to plunge. We saw the biggest bailout of all time – the US government seized mortgage mega-giants Fannie Mae and Freddie Mac. Together they either originated or back $5 trillion in mortgages, nearly half of the total outstanding in the entire US. By comparison, Northern Rock is a mere drop in the ocean.

Then, as I write on 15th September, US investment bank Lehman Brothers has filed for bankruptcy, Merrill Lynch was bought by Bank of America following emergency talks which lasted just 48 hours, the world's biggest insurance company, AIG, has asked for a government loan of $40 billion while it also engages in emergency talks, the largest savings and loan institution in America, Washington Mutual, looks like it may be in a similarly precarious position and the Dow Jones has just crashed 500 points, the most since the 9/11 terrorist attacks.

All of this means very bad things for the ongoing credit crunch and for house prices.
Furthermore, the major markets have been going crazy all month long. There was massive volatility in the world’s stock markets as upward price spikes were followed by spikes back down. The London Stock Exchange systems crashed following the Fannie and Freddie bailout announcement, on what should have been one of the biggest trading days of the year. Oil fell back to the $100 level after closing in on the $150 a barrel level earlier in the year (it fell despite two hurricanes entering the Gulf of Mexico, threatening oil rigs and oil refineries). The dollar rose following last month’s government intervention in the currency markets. This caused gold and silver to start falling, which in turn lead to discrepancies between the paper price of the metals and their real physical price. It's been mad!

I have learned a huge amount this month. I have been intrigued, bewildered, excited, confused, apprehensive, annoyed, surprised, jubilant, and after all that has happened – exhausted! I have had a lot of late nights in front of my terminal and have paid close attention throughout. We really do live in interesting times right now and the opportunity to learn like this does not come along very often. A number of perspectives have become clear to me over the last few weeks and I will send out an update later in the month to share a couple of these with you.

Now on to the housing market….

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House Prices & Housing Market Overview...

A Summer Lull, Plummeting House Prices, Swelling Inventory

The property market traditionally slows down during the summer as schools break up and people go away on holiday. In such a fragile market, this seasonal lull has had a devastating impact.

House Prices in Free-Fall

House prices went into free-fall in August. Nationwide reported average house prices down 2.8% (£4,663), Halifax down 1.8% (£3,173), Hometrack down 0.9% and Rightmove’s asking prices were down 2.3% (£5,403). All sectors of the market are being affected, with new-build taking a particular battering. Looking around in my area, asking prices on a property could be 20% or more lower than last year and still no one is buying. Price cuts no longer guarantee a sale!
A number of obstacles exist which continue to pressure the market. Lending restrictions have cut the number of serious buyers entering the market. A couple of years ago it was possible to get a two year fixed mortgage at 4%, while the average rate now stands at around 7%. In addition, there is a distinct lack of buyers with meaningful deposits. Parents, who have recently stumped up much of the cash needed to buy overpriced houses, are being hit by the fall in the values of their own homes and by the ever increasing cost of living.

Even when buyers do decide that they want to dip their toes into the market, the low, cautious valuations made by mortgage company surveyors means that buyers can no longer secure enough funding from their mortgage companies. Many deals have fallen through.
Most buyers are unwilling to commit at the present time and fear that prices fall further, which they will.

Swelling Inventory

The lack of buyers means that very few homes are going under offer. At the same time new instructions to sell continue to pour into estate agents’ offices and many landlords have decided to sell up, adding to the already existing glut. Consequently, the inventory of homes on the market is extremely high and swelling by the day.

Despite the overwhelming number of properties, estate agents continued to cut their numbers and to close offices last month. Halifax has shut 25% of its offices nationwide and it is estimated that 150 estate agency offices have been closing per month.

Sellers Inadvertently Keep Buyers Out of the Market

There has been a dramatic increase in the number of frustrated vendors deciding to put their homes on the rental market because they can’t achieve the sales prices they are looking for. RICS has reported that the number of people letting their homes has increased nationwide at its fastest rate since the survey began in 1998.

The aim of these vendors is to ride out the current turmoil and to put their home back up for sale once prices recover. My experience tells me that they will probably be waiting over a decade before this happens. They either need to sell now, accepting that house prices are set to fall dramatically in the years ahead, or they should decide not to move and stay where they are.

These actions are inadvertently helping would-be buyers to stay out of the market and to rent for longer. What I have seen is that the growth in tenant demand from people unwilling or unable to purchase is being outstripped by the number of new properties coming onto the rental market. In these circumstances, rental supply exceeds demand and rents could head downwards.

Looking Forward

Activity usually picks up in September after the summer lull. This is extremely unlikely this year. Many people will be waiting to see how the rest of the year plays out. Economic volatility, job security and mortgage lending restrictions will be at the forefront of their minds.

The Government’s announcement of a suspension of stamp duty on properties under £175k will have little positive impact on the housing market. With house prices falling 1-2% per month, it does not take long for the stamp duty reprieve to become inconsequential. Also, any buyers seeking properties around £200k will now aim to negotiate price reductions in order to bring the price below the stamp duty level. This may serve to accelerate the crash. Here the Government has again fallen prey to the law of unintended consequences. Their aim of helping the market stabilise is likely to do exactly the opposite.

Which Homes are Selling?

The few vendors who do manage to successfully secure a sale tend to be those selling stylishly modernised homes, suggesting that buyers are happier with a property that will not incur any further financial outlay.

Back to Section Index >

The Month’s Big Developments

Fannie and Freddie Bailout

September 7th saw the biggest government bailout in history. US Treasury Secretary Henry Paulson said that regulators had put mortgage giants Fannie Mae and Freddie Mac into conservatorship, that their CEO’s had been ousted and that the Treasury stands ready to inject $100 billion into each entity.
Fannie and Freddie together either originated or back $5 trillion in mortgages, nearly half of the total outstanding in the entire US. Fannie and Freddie have incurred massive losses as the US house price crash gathers pace, and their capacity to absorb further losses while supporting business activity was called into question. Its not that they were too big to fail, it’s that they were too big to liquidate. You couldn’t sell off that massive portfolio without causing pandemonium in the world’s financial markets.

The move won’t help falling US house prices however, because it won’t make life easier for millions of Americans struggling to repay their mortgages. Similarly it won’t reduce the massive 4.7 million stock of unsold homes which represent an 11 month supply at the current sales pace.

Also, under the bailout plan, actions will be put into place to cut Fannie and Freddie's mortgage portfolios sharply, starting in 2010. Since they currently represent 50% of all US mortgages, how will Americans be able to get a mortgage once these portfolio cuts commence? I suspect that this will exaggerate the falls in house further and into the foreseeable future.

Lehman Brothers – Biggest Bankruptcy Ever

September 15th saw the fourth largest investment bank in the US file for Chapter 11 bankruptcy protection, ending its 158-year-old Wall Street run. Its shares have fallen 99.7% since the start of the year. The announcement came after a frantic weekend of negotiations in which potential acquirers, including Barclays, backed away once it became clear that the US government would not commit any tax payers month to save the firm. The bank has total debts of $613 billion.

Merrill Lynch – Bought by Bank of America Following Emergency Talks

The same day, Merrill Lynch agreed to be bought by BoA in a $50 billion all-stock deal, creating the world’s largest securities brokerage. The deal, put together within 48 hours, is surprising as most onlookers believed that BoA was bidding for Lehman. Merrill shares are down around 76% for the year.

AIG – Asks for $40 billion Government Loan, in Rescue Talks with Warren Buffett

Also on Monday, insurance giant AIG revealed that it is seeking a $40 billion bridge loan from the US Federal Reserve. Given the reluctance to bail out Lehman, it seems unlikely that AIG will be able to secure such a lifeline. The company is also rumoured to be in emergency rescue talks with Warren Buffett. Its shares are down 93% for the year.

Washington Mutual – Next?

Washington Mutual shares continue to dive on fears that the top US savings and loan also won’t be able to raise enough capital in order to survive. It will probably be the next Lehman Brothers. Its shares are down 95% for the year.

Stock Market Crash

The above events are unprecedented and as expected have had a major impact on the stock markets. At the time of writing, close of business on September 15th, the DJIA is down over 500 points (4.4%), the biggest fall since the 9/11 terrorist attacks in 2001. The Nasdaq is off 81 points (3.6%) and the S&P500 is off 59 points (4.7%).

Back to Section Index >

What am I Buying?

Where Should You Invest During Crises?

I have continued to see further falls in the UK and US stock markets. In my view we are still some way from the bottom and today’s events confirm that fact. To be clear, the troubles are not over, there is more carnage to come. In a similar vein, corporate bonds could also be considered too risky.

Government Gilts and Treasuries do offer security and peace of mind, but with yields of only 3-4% and real inflation surging at around 10% per annum, the return you receive from your investment is negative 6-7%. Hardly compelling.

Where else can you invest? Property? Only joking!

I am Buying…

During this period of turmoil I have been adding to my positions in physical gold and silver. While stocks plummeted today, gold rose 3% as sophisticated investors moved their funds into a secure store of value. For those of you wishing to follow their lead I continue to recommend BullionVault. The gold you buy is proven, pure gold grams of bullion market gold bars stored in the professional vault of your choice: Zurich, New York or London. Sign-up is free and easy, and you can trade whenever you wish.

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Looking Ahead

The US Federal Reserve convenes tomorrow to make its next decision on interest rates. My feeling is that we will see a rate cut in order to satisfy a reeling market. We may also see cuts made by the Bank of England and the European Central Bank shortly.

During the month I will need to re-examine my outlook for the anticipated fall in US house prices, which currently stands at an estimated drop of 30%.

As I mentioned earlier, I will also send out an interim outlook later in the month to discuss some of my key perspectives relating to the unprecedented events we are now experiencing.

Finally, I recommend that you read the following article by Dominic Frisby of MoneyWeek which discusses the government’s attempts to save the housing market and includes a great chart which shows that the average UK house price has already crashed 40% compared to the price of gold.

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Keep reading and keep updated.

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