90% of new US mortgage bonds now government guaranteed

US house pricesMay13.pngIt would be nice to believe that a sustained recovery was now underway in the US housing market. But unfortunately, there is little evidence to confirm the claims now being made. As the chart of prices from the S&P Case-Shiller index shows:

• February prices (red square) remain in the same range seen since the end of 2008
• Certainly they have rebounded since the trough since last year (green line)
• But February’s $159k price is still 30% below peak levels

There are also good reasons to be careful when analysing the data. As a Congressional committee noted last week when reporting on housing finance:

“The displacement of private sector competition is so large that roughly 90 per cent of all residential mortgage originations are securitised into government-backed [bonds].”

As Gillian Tett of the Financial Times added:

“Yes, you read that right: in the supposed land of the free (markets), the state is now guaranteeing almost all new mortgage bonds. Government involvement on this scale has never been seen before in American history; although entities such as Fannie Mae have existed for decades, they used to guarantee between a fifth and a half of the market. Indeed, state support like this is unprecedented anywhere in the western world – even in the parts of Europe that right-wing American senators sometimes like to label as “socialist”.”

Ms Tett is an acknowledged expert in this area, and deservedly won the ‘Journalist of the Year’ award for her 2006-8 work warning of the sub-prime crisis. Equally worrying is the fact that state support on this scale has only managed to stabilise prices.

Thus despite the current hype, a second down-leg for the housing market certainly cannot be ruled out. After all, the blog knows very few Americans who would be happy to describe themselves as ‘socialists’.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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