US housing woes unlikely to hurt broader economy
March 26, 2007
**THERE is increasing confidence in the US that trouble in the housing market will not spill over into the wider economy.** Two weeks ago global markets plunged on the fears of a housing-led financial crisis in the US but last week Wall Street put on its best performance in four years. The market has flipped again from the bears to run with the bulls.
Last week’s extraordinary snap-back was led mostly by the US Federal Reserve - it’s not the first time the governors of the central bank have ridden in to rescue the markets - when it hinted that its next move in interest rates might be down. That’s a positive sign for stock prices and also a reason behind last week’s sharp gains in the Australian dollar.
The party mood really started last Wednesday when the Fed dropped language from its monthly missive which indicated it was still looking to increase interest rates. The Fed statement that accompanied the decision to hold interest rates at 5.25 per cent omitted any reference to the possible need for an “additional firming” in policy.
That was the first time since the Fed started increasing rates in mid-2004 that it has left open the possibility of the need to cut rates.
It set the scene for the gains in the markets, buttressed on Friday with some better data on the condition of the US housing market.
US home sales rose 3.9 per cent in February, the National Association of Realtors said, with existing home sales running at an annualised pace of 6.69 million, well ahead of market expectations of 6.3 million.
The monthly report indicated that lower prices - following a long boom in the property market that ended last year - were starting to stimulate sales.
But that was still bad news for individual homes owners since the median sales price fell 1.3 per cent to $US212,800 - the seventh monthly decline in US home prices.
The latest data also shows existing home sales are still 3.6 per cent below the 6.94 million unit pace in February 2006, but last month’s increase was the second in a row and the biggest monthly rise in three years.
“Some of the rise in home sales may be from mild weather that brought out shoppers in December, but fundamentals have improved in the housing market and buyers see a window now with historically low mortgage interest rates and competitive pricing by sellers,” said David Lereah, NAR’s chief economist.
The firmer tone last week has certainly put the talk of recession in the US back in its place.
There was an interesting line on that score on Wall Street last week from Carl Steidtmann, Deloitte Research chief economist.
He believes recessions are not as likely to happen as they were in the past. “No business cycle lasts forever. However, the structural and mix changes that have taken place in the economy over the past 50 years make it much more difficult to create the conditions that would lead to a recession today,” he says in a monthly commentary.
“Despite the problems in housing and some sectors of manufacturing, continued slow growth is still the most likely path for the economy to follow in the coming year.” That’s the best outcome for equity markets - no recession but also not a runaway economy that might prompt a rash of interest rate rises.
The Dow Jones Industrial Average rose 19.87 to 12,481.01 on Friday, moving into positive territory for the year and up 3.1 per cent for the week.