It’s a case of pick your disaster today. The US housing monster/disaster and Ford’s $US8.7 billion record quarterly has reminded everyone that saving Fannie Mae and Freddie Mac and a drop of $US20 a barrel in the oil price doesn’t mean much in the grand scheme of things.
Wall Street finally tired of being artificially buoyant took a realistic look at the news — and tanked with all major indices off 2% or more, and the Dow down 283 points alone. Our market, which had traded up on a recovery in the banks, went “Agghhh!” and sold off, shedding close to 3% in value in the first 15 minutes.
Financial stocks which had their sharpest rise in 17 years last week, last night had their sharpest fall in eight years: beware the sucker rally. Perhaps it was the gloomy estimate from Bill Gross, a noted bear and the head of PIMCO, the world’s biggest bond fund. He said credit losses would top the $US1 trillion mark from the US subprime mortgage mess and associated problems.
PIMCO estimates a total of 5 trillion dollars of mortgage loans are in risky asset categories and that nearly 1 trillion dollars of cumulative losses will finally mark the gravestone of this housing bubble. The problem with writing off 1 trillion dollars from the finance industry’s cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets, a reduction in lending or both.
Coming the day that the stock of unsold houses rose to double what they should be to clear the market, the more astute of Wall Street’s analysts thought “It’s back”, despite subprime-induced trouble never going away. It’s stating the bleeding obvious to say it remains central to all the problems confronting the US economy and financial markets.
Oh, and then there’s the fact that the world’s largest banking system is effectively insolvent. America’s commercial banks (not the investment banks like Goldman Sachs) borrowed a record $US16.4 billion a day from the Fed via its discount window, on top of the $US150 billion in term loans they have taken up under a separate financing facility.
In fact, the funding in the week to Wednesday surpassed the previous high of $US16 billion in the week ended 28 May. Commercial banks also have $US150 billion in outstanding Fed loans from the central bank’s Term Auction Facility, which conducts sales of 28-day funds every two weeks. No wonder the banks are cutting back lending: they don’t have very much to borrow anyway. That’s why the latest gloomy figures on house sales won’t be the last.
According to America’s national real estate agents group, sales of previously-owned homes in the US fell by a larger than expected 2.6% in June. The National Association of Realtors said existing home sales dropped from an annual rate of 4.99 million in May to 4.86 million last month – the lowest in a decade and 15.5% under the level of June last year.
More worrying was the measure of the time needed to sell the inventory of unsold homes rose to an 11.1 month supply from a 10.8 month supply in May. The Association said the market is in balance when between five and six months supply of housing is on the market. So the backlog is effectively double what is needed to see the market clear quickly.
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Next week sees the release of the Standard & Poor’s Case Schiller House Price Index for May. It showed that prices were down 18% in April from their all time highs and 15% lower than a year ago. Standby for another reminder of how deep the housing blackhole is becoming.