More problems for the US housing and mortgage market whilst another vote is cast for a UK interest-rate rise

Yesterday it looked like the revolutionaries were gaining control of some parts of Libya and accordingly financial markets recovered a little. However Colonel Gaddafi’s rather bizarre performance on television where he said he would fight to the death sent the American stock market lower after Europe had closed for the day.Sadly the to the death message seems to be literally happening to many protestors. The US Dow Jones equity index fell by 178 points to 12.212 as it caught up on Mondays falls due to its bank holiday. The crude oil price as measured by the West Texas Intermediate benchmark is rising too and this morning is two US dollars higher than yesterday at just under 96 US dollars per barrel. Brent crude is little changed at just over 107 US dollars so the spread has narrowed. One of the ironies of a rising oil price is that it puts cash in the hands of the regimes most under threat at this time and makes them even wealthier.

The US Housing Market Sees More Price Falls

Yesterday saw the continuation of another trend that I have been reporting on for a while. This is that house prices are continuing to fall in America and are in danger of returning to its post credit crunch lows. Indeed the Case/Schiller price report released yesterday told us this and the emphasis is mine..

Data through December 2010, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices … show that the U.S. National Home Price Index declined by 3.9% during the fourth quarter of 2010. The National Index is down 4.1% versus the fourth quarter of 2009, which is the lowest annual growth rate since the third quarter of 2009, when prices were falling at an 8.6% annual rate. As of December 2010, 18 of the 20 MSAs (cities)  covered by S&P/Case-Shiller Home Price Indices and both monthly composites were down compared to December 2009.

So not only are prices falling but they are falling at a substantial rate. Indeed they are falling at rates which imply that the US housing market is as troubled now as it was when we were in the midst of the credit crunch crisis. If we look at the numbers in these terms we find this in the report.

Eleven MSAs posted new index level lows in December 2010, since their 2006/2007 peaks. These cities are Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Miami, New York, Phoenix, Portland (OR), Seattle and Tampa.
It would appear that house prices are falling in nearly every area (Washington DC  is an exception) and that a trend has been established where more and more cities are hitting post credit crunch lows. The national indices have not yet hit these lows but they are falling and do not have far to go.
Where next for the US housing market?
The two economists who compiled this index offered their views on this as the figures were released. Mr. Case said that the market was  at “a rocky bottom with a down trend.” Not entirely optimistic but better than Mr. Schiller’s view that he saw “a substantial risk” of declines of “15 percent, 20 percent, 25 percent.” He felt that the foreclosure crisis could continue, as well as uncertainty over the futures of the two state mortgage companies Freddie Mac and Fannie Mae combined with the possibility of a reduction in mortgage tax relief  making for a toxic mix for US house prices.
So they both think down the only debate is how much. Just to tidy up the Case-Schiller index itself it is a lagging indicator so the situation is probably already worse than recorded here.

The S&P/Case-Shiller Home Price Indices are calculated monthly using a three-month moving average and published with a two month lag.

Another problem for the US housing market: the over-recording of home sales

Home sales in the United States are recorded by the National Association of Realtors (Estate Agents) and there has been a case put forward with the blogger Bill McBride to the fore that they have recorded too many home sales since 2006/2007. This has been gathering force and it seems that this may well be true with sales being over-estimated by some 15/20% since then. Why does this matter? Because if as increasingly seems likely this is true then there is a much larger stock of unsold homes in the US than the NAR has recorded. This explains more clearly why house prices are falling and again points to further falls.

Yet again we see a clear moral hazard of those with a vested interest in higher prices being responsible for producing house market statistics….

The US foreclosure crisis continues

For those who have not followed this story then what has happened is that many US banks did not process the correct paperwork when foreclosing on property ( repossession in UK terms) which has led to the argument that many of these claims are invalid and illegal. They were supposed to be signed and notified individually and yet in what has become called “robo-signing” one individual has her name on tens of thousands of such documents many of which are incorrectly completed. 

As the investigation into this continues the whole process has become clogged up. Some 4.63% of loans are in foreclosure and around 14% of loans have overdue payments according to the US Mortgage Bankers Association.


It is clear that the US housing market has serious problems and we can expect yet more price falls as 2011 progresses. Whilst we see recorded economic growth and an extraordinary effort by the US Federal Reserve to pump money into the economy it does not appear to be offering much relief to the housing market. Indeed the twin problems faced by the US, in my opinion, are this falling housing market and the slow improvement in unemployment where sharp falls in the recorded headline figures mask deeper underlying problems.

UK Public-Sector Borrowing Figures Improve in January

Regular readers will recall that in the latter part of 2010 there was little sign of an improvement in the UK’s fiscal position. Indeed in October and November it looked like it might be getting worse and not better! Fortunately the figures for January were an improvement, however care is needed as they are not due to austerity they are due to more tax being collected. In this I feel that there were two main influences.

1. The amount of income tax collected rose as those who had the ability to do so paid as much tax as possible in January to pay at a rate of 40% rather than at 50%. Hopefully there was also some growth in the economy here too! Either way the amount collected by income and capital gains tax rose from £19.92 billion in January 2010 to £23.68 billion this January.

2. The increase in the rate of VAT to 20% also led to more tax being collected but this was a much smaller influence at £658 million compared with last January.

Here is the effect of this and as these numbers are different to those reported in the mainstream media let me explain why. I follow what the UK government has borrowed in total whereas the figures are presented with the lower numbers which exclude financial interventions at the top and many follow these as the other amounts are “temporary”. As nearly all our borrowing is supposed to be “temporary” there is an irony here that probably escapes them…..

public sector net borrowing was -£5.3 billion; this is £5.2 billion lower net borrowing than in January 2010, when net borrowing was -£0.1 billion; (for the financial year so far) public sector net borrowing was £98.1 billion; this is £5.1 billion lower net borrowing than in the same period of 2009/10, when net borrowing was £103.2 billion.


Whilst there is an improvement in the figures it is because we are being taxed more severely. There is still little sign (apart from a continued media fanfare) of any great impact from spending cuts.Should some of the improvement be due to tax being paid now to avoid higher rates of tax in the future then later figures may disappoint.

UK Monetary Policy Committee Minutes for February

These minutes were released this morning and I have to confess that Andrew Sentance’s recent remark that they would be interesting meant I was anticipating them. They turned out to be in line with his hint with perhaps an added soupcon that he now wants a 0.5% rise rather than 0.25%.

For three members, the case for removing some monetary stimulus at this meeting was compelling.

So Spencer Dale joined Martin Weale and Andrew Sentance in voting for an increase in interest-rates. As he is a Bank of England official rather than an “outsider” this move is more significant than just the one vote as it implies that the Governor Mervyn King is struggling to convince even his own staff with his views. It also begs the question of why the man who gave a speech in the autumn using the phrase “inflation, inflation, inflation” has changed his mind. The quote may make such thoughts appear to be easily answered but in the same speech Spencer Dale informed us that in his period of tenure on the Monetary Policy Committee inflation had been over its target in 41 out of 50 months. So he has a high tolerance to excess inflation as expressed by his voting record.

In my view there are some hints as to why he might have changed his mind tucked away in the minutes themselves.

Overall, the most recent data had been consistent with continued buoyant growth in global activity and a pickup in global inflation.

The rebound in world demand had been associated with a notable pickup in global inflation, with the IMF’s measure of global CPI inflation rising from just over 1% in mid-2009 to almost 4% by the end of 2010.

And perhaps most clearly if we look at the UK in isolation.

Nominal domestic demand had increased by 6.8% in the four quarters to Q3, accompanied by nominal consumption growth of 6.3%, in part reflecting the VAT increase in January 2010. These were both above their average growth rates for the decade before 2007.


As someone who has felt since late 2009 that the UK needs a nudge higher in interest-rates I welcome any move which makes this more likely. Personally I feel that the timing is late as it takes 18/24 months for the full impact to be felt so as we still have to wait for an interest-rate rise there is plenty of scope for inflation to take hold in the meantime. The future is uncertain but if we look at the past then our politicians are unlikely to have put in a much worse performance than this.

In pure economic terms it is the increases in nominal demand and consumption which are yet another clear signal. If they are both rising at above 6% and economic growth is slowing then there is a gap between the two which is likely to be filled by inflation. If we look again please consider what did happen pre 2007………..

These were both above their average growth rates for the decade before 2007.


9 thoughts on “More problems for the US housing and mortgage market whilst another vote is cast for a UK interest-rate rise

  1. You relate: Some 4.63% of loans are in foreclosure and around 14% of loans have overdue payments according to the US Mortgage Bankers Association.

    I comment: Roughly 10 percent of those with mortgages, are squatting and are living payment free in homes owned by financial institutions.

  2. I have been observing for some time now that the Treasury’s figures do not show the deficit being reduced by spending cuts (spending is still increasing) but by increased tax receipts (roughly 7% compound p.a.).

    I have also argued that this inrease in receipts looked far from likely. It would, therefore, be churlish not to acknowledge that the figures for January surprised on the up-side.

    That having been said, the nagging question is whether these receipts are the result of greater economic activity (good news) or of increased tax rates (not so good).

    One might also add that paying down a deficit of £150bn by £5bn leaves rather a long way to go.

    • Am I right in thinking that total accumulated UK government debt is approx £900bn excl. bank bailouts (£2500bn if you add those in) and increasing by £150bn a year?

      Although now due to January’s tax receipts it’s in line to increase by just(!) another £145bn!

      In those terms £5bn is just a rounding error. It costs about £45bn a year to service the national debt in interest alone.

    • Hi Chris
      Just to say that the improved economic outlook scenario does not quite fit with the recent official GDP figures. These will be revised tomorrow and may well be revised up a fair bit but the income and capital taxes section was very strong being up 19% on the previous year so there is likely to be more to it than economic growth. If it is paying tax early to avoid higher rates we may yet see the Laffer curve in evidence…

  3. Hello,
    “Your numbers are pretty much right. Our deficit ex. bailouts is £867.2 billion and with bailouts (the number I prefer) is £2244 billion.”

    I’m confused!
    According to Tim Congdon:

    “Contrary to a mass of sloppily-worded newspaper reports, the US and Britain have not “given” any money to the banks. Instead, they have extended loans (most of them at an above-market rate of interest and now repaid), they have given guarantees on bank liabilities (none of them called, but with the banks paying guarantee fees) and they have invested in banks’ equity (on which they may well make a handsome capital gain a few years from now). Strange though it may seem, and despite a consensus fabricated by the banker-bashing media, taxpayers ought to make a profit on their governments’ crisis interventions in banking systems.”

    “So what is the right answer? Has the banking crisis lost the taxpayer £2 billion, £131 billion or £500 billion? 
    All these numbers are wrong. The truth is that the taxpayer will make an immense profit from the state’s financial sector interventions, not a loss.”

    • Hi John
      Welcome to my part of the blogosphere and thank you for the Tim Congdon reference. I first read articles by him back in the 1980s when he was at Union Discount and I was starting my career….

      As to his points and your quote he is discussing different matters to mine. It is not a simple analysis but looking at the quote his approach differs from mine in the treatment of “they have given guarantees on bank liabilities” for example as I am someone who believes that there has been too much debt put off-balance sheet and that accordingly I will always quote numbers which include as much as possible and try to put everything on balance sheet. So I take the widest numbers from the Office for National Statistics. Another reason why I use ONS figures is that I also run a policy of accepting official figures until they are proven to be incorrect.

      Now my approach is by no means perfect as I make no allowance for private finance initiative liabilities which are a problem but remain mostly undefined in the UK. Also there are assets the banks have which could be set against these liabilities but not all can be valued properly and so are not included in the numbers. Put another way.

      “Particular care should be taken when interpreting the revised figures for PSND. This series is calculated as financial liabilities less liquid assets; it includes most liabilities but excludes illiquid assets for instance, in the form of lending to businesses; for mortgages and holdings of corporate bonds. The latter exclusion is important because the public sector banking groups have considerable amounts of illiquid assets. What PSND shows is the extent to which the public sector’s liabilities are matched by assets which can be realised quickly.”

      So there you have it. I am discussing liabilities/debt and I include them as accurately as I can. However the numbers are flawed, but to ignore liabilities because they are “temporary” is an excuse authorities have used down the ages! For example income tax was a temporary move back in the Napoleonic wars if I remember rightly…

      As to whether we will make a profit that depends on many factors, we are certainly doing the best we can to create a favourable environment for banks to make profits but that is almost a blog post in itself!

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