There will be fresh economic shocks on the scale of the current credit squeeze if US house prices continue to fall, one of the country’s leading housing experts warned on Wednesday.
“The decline in house prices stands to create future dislocations, like the credit crisis we have just seen,” Robert Shiller, a Yale economist, told a Senate panel on Wednesday.
There were fresh signs of weakness ahead for the housing sector as figures showed applications for building permits fell to a 12-year-low.
Housing starts dropped to the lowest level since June 1995, declining 2.6 per cent to an annual rate of 1.331m units.
The decline in construction activity also appeared to be spreading to the north-east, where starts were 38 per cent lower.
Patrick Newport, an economist at Global Insight, said: ”The eye of the storm is just ahead.”
Consumer prices fell last month by 0.1 per cent as prices at the pump dropped by nearly 5 per cent.
Core prices - excluding volatile food and energy costs - increased by 0.2 per cent, but the annual underlying inflation rate edged down to a 17-month low of 2.1 per cent from 2.2 per cent.
”Overall, the figures support the idea that inflation is much less of a concern than it was six months ago,” said Paul Ashworth, an economist at Capital Economics.
”The Fed is lucky that inflation is beginning to behave itself again, because the housing market is in desperate need of some monetary stimulus,” he added.
Mr Shiller told the Senate panel on Wednesday that while there had been a focus “on lax and irresponsible lending standards, I believe that this loss in housing value is the major ultimate reason we see a crisis today.”
The economist said he feared “the collapse of home prices might turn out to be the most severe since the Great Depression.”
Alan Greenspan, former Federal Reserve chairman, told the Financial Times this week that double digit falls in house prices from their peaks would not be surprising.
A national fall in house prices on that scale would be unprecedented in US history and would have an economic cost several times greater than the meltdown in the subprime mortgage market that triggered the current financial crisis.
The Center for Responsible Lending has predicted that foreclosures on subprime loans will lead to a cumulative loss of $164bn in home equity. Investment banks have suggested the costs to investors and financial institutions could be more than $300bn.
The Senate on Wednesday heard from experts who said a 15 per cent fall in house prices would wipe out $3,000bn of household wealth.
Alex Pollock, a fellow at the conservative American Enterprise Institute, said: “Residential real estate is a huge asset class, with an aggregate value of about $21,000bn, and is of course the single largest component of the wealth of most households.”
“A year ago, it was common to say that while house prices would periodically fall on a regional basis, they could not on a national basis....Well, now house prices are falling on a national basis,” he said
Mr Shiller said it was “difficult to predict the depth, duration and all of the consequences” of the worsening housing slump.
“The Federal Reserve will undoubtedly take aggressive actions, which will mitigate its severity. But, if home price deflation persists or intensifies, they may discover that the Achille’s Heel of this resilient economy is the evaporation of confidence that can accompany the end-of-boom psychology,” he said.
Senator Charles Schumer, chairman of the joint economic committee, criticised the handling of the subprime crisis by the Fed and the Bush administration.
“In March, Chairman [Ben] Bernanke came before this committee and told us that the problems in the subprime market would have little or no impact on the overall economy,” he said
“Despite all the reassuring statements we’ve heard from the administration that the impact of this mess would be ‘contained’, it has not been contained, but has been a contagion that has spread to all sectors of the economy,” he added.
Peter Orszag, director of the non-partisan congressional budget bffice, told the Senate panel that the “turbulence in housing markets could affect the broader macroeconomy through ”various channels” and that the current outlook was ”particularly uncertain”.
He said the main channels were “reduced investment in housing; a reduction in consumer spending because household wealth declines; contagion in financial markets ...and a lessening of consumers’ and businesses’ confidence about the future”.
“The potential effects involving contagion and confidence are especially difficult to evaluate because they depend in part on how financial market participants, consumers, and business executives perceive the situation,” he added.
But he noted that most private sector economists were still predicting economic growth next year.
No comments:
Post a Comment