US housing markets are getting worse. Today’s S&P/Case-Schiller index showed prices declined 8.9% in December. Moody’s said that 10% of homeowners (8.8 million people) had negative equity in their homes. And unsurprisingly, given this background, bank repossessions rose 90% versus January 2007 levels.
Price changes generally follow changes in volume, up or down. And so yesterday’s existing home data from the US Realtors Association indicates that we are still some distance from a price bottom. January’s sales were 23.4% below the level of January 2007. Inventory, the other major indicator, is also still moving in the wrong direction. It is now at 10.3 months, compared to 9.7 months in December.
The underlying problem is that credit availability continues to tighten. The Realtors say ‘subprime loans and other risky mortgage products have virtually disappeared from the market’. And the Fed’s interest rate cuts are having little impact on the price of credit for those able to get loans. The standard 30 year mortgage rate was 6.22% a year ago, and is now 5.76%. Had the rate followed the Fed’s cuts, it would be 3.97%.
The same reluctance to lend is now developing in the UK, following the Northern Rock nationalisation. ‘The Guardian’ reports today that lenders are focused on margin preservation as credit markets tighten, and are no longer ‘worried about market share and volume’. 125% mortgages are unavailable for new applicants, and many major lenders are now demanding 25% deposits for the first time in many years.
In the past, comments ‘The Guardian’, falls in house prices have normally been driven by rising unemployment. This time, however, the main factor is the ‘credit crunch’, which means there is a ‘lack of funds for lenders’. Until this can be resolved, chemical companies will continue to suffer from the double whammy of lower sales into the critical housing market, and higher borrowing costs.