Housing: Bubble still imploding

• House prices falling fast – Case Shiller index shows 27% decline from peak but data relates to December. Lower today and prices now falling almost everywhere in the US.
• Home inventories very high with sales low
• Borrowers find it harder to qualify and hard to raise down-payment even though housing affordability is good now
• Mortgage rates lower but house price expectations are negative
• House prices set to fall into 2010 with 40-50% total decline likely
• Government support measures will help but will take time to implement
• Home-builder confidence very low

Credit crunch easing a little with Fed help

• Credit spreads still elevated and banks still tightening lending criteria
• Lenders and borrowers cautious because of fears of a deep recession, ongoing deleveraging and the continuing fall in house prices
• Banks still have too many bad assets and not enough capital – hence their low stock prices, with nationalisation becoming more likely
• Fed actions to improve credit markets are having some effect with the credit crunch eased for better rated borrowers and mortgage rates down
• Commercial paper and investment grade bond market improved
• Fed purchase of Agency paper is lowering mortgage rates and raising money supply
• TALF plan to kick-start securitisation of consumer and small business loans to start soon. Will go up to $1 trillion.
• But market nervousness up in last 2 weeks
• Weaker borrowers continue to find it tough going

Four legs to policy - but still inadequate

• Fiscal stimulus of $787 bn spread over 2 years will help but will not impact much until H2.
• Mix of tax cuts, infrastructure spending, welfare spending and support for local governments
• But part of tax cuts will be saved and spending will be slow to build
• Homeowner Affordability and Stability Plan will also help but will not stop house prices falling further
• Allows some people with high LTV ratios to refinance at lower rates
• Subsidies to some people towards interest payments, cost shared by govt. and lender
• More capital for Freddie and Fannie and pushing them to lend more
• Financial Stability Plan lacks detail and implementation uncertain
• Expansion of TALF plan is very positive – now $1trillion. More may be necessary
• Stress test for banks needs to be tough and followed by radical triage – outcome unclear now
• Plans to remove toxic assets from banks still not worked out
• Quantitative money easing underway now through purchases of CP, Agency paper and, soon, the TALF. Money supply growing very fast

Consumers: Under intense pressure

• Consumer confidence near all time lows despite low gas prices
• Rising unemployment is depressing sentiment
• Falling house and stock prices are reducing wealth
• Credit crunch is making loans harder to get and higher priced
• New tax rebates coming soon but much will be saved
• Car sales slumped in part due to lack of credit
• Consumer spending to stay weak - for a prolonged period as the savings rate trends higher