As the US population welcomes President Barak Obama to the White House it would appear that over the past few months a feel-good factor has started to emerge in the US, in light of the changing political environment. However, a look at the US housing market and forecasts for the future would firmly suggest that the US property sector could be in serious trouble for the next 2 to 3 years. So what exactly is going on and will the multi-billion dollar rescue packages actually make a difference?
An overview of the US housing market
As the US housing boom continued up until 2007 the warnings from a small number of economic analysts in the US were drowned out by more and more analysts jumping on the bandwagon and suggesting that the US property market was set to go onwards and upwards for many years to come. However, in hindsight the sub-prime mortgage market problems actually started to arise towards end of 2006 although many analysts chose to ignore the signs.
As a consequence, with the US government unwilling or unable to nip the potential problem in the bud at a very early stage, it was allowed to fester for some months. As a consequence, when the credit crunch started to materialise towards the middle of 2007 the damage had been done and there was literally nothing the US authorities or worldwide authorities could do to avert what has become a major problem.
As mortgage companies in the sub-prime mortgage sector began to suffer this then spread to the traditional mortgage market and further and further up the finance ladder. When the first sub-prime mortgage company went under many experts ignored this, when the second sub-prime mortgage company hit the buffers the warning signs started to flash and when the third sub-prime mortgage company went out of business it was literally a free for all.
The performance of the US housing market
The year-on-year drop in US property prices to the third quarter of 2008 was a very disappointing 16.6%. However, the specific US index which consists of the 10 major cities in the country showed a fall of 18.6% over the same period, with the 20 city home index showing a slightly smaller fall of 17.4%. This shows perfectly how the massive investment into large city property markets saw prices pushed to levels which were simply unaffordable and unsustainable in the long term. As a consequence there are now literally “tent cities” in many areas of the US containing the millions upon millions of people who have lost their homes in the current economic downturn.
The future of the US housing market
As the US housing market continues to head downwards there are serious concerns that this phase will not end until at least the end of 2010 or possibly as late as mid-2011. By the time the property market stabilises and starts to show signs of an upturn we were literally see millions upon millions of additional homes repossessed and substantial numbers of the US population living on the streets or in “tent cities”. The recently announced US rescue package aimed at the housing market and the US public in general will take time to kick in, as we have seen in the UK, which is why any substantial upturn in the US economy is still some way off.
The additional problem for the US housing market is the fact that as prices continue to fall we will see more and more sellers emerging, willing to take distressed sale prices for their assets, which will in turn push the market lower and lower. A self-fulfilling prophecy will see buyers staying on the sidelines and a substantial increase in the number of properties for sale. There are very few property analysts forecasting any short-term recovery in the US property market and even fewer are recommending clients pick up cheap assets at current levels.
How was the credit crunch allowed to develop?
It is only now that we see the impact the ongoing credit crunch and economic downturn has had upon the US population that we can look back in hindsight at strategies and incidents which have led to the current predicament. While it is easy to play the blame game and pick up on certain factors and certain figures who played their part, in reality the US government, US local authorities, US finance companies and the US population have all played their part.
Some factors to consider include:-
The inability of the US authorities to introduce an appropriate regulatory framework which would have reined in the excessive business which was being conducted on crazy terms in the US mortgage market. This obsession with the “free market” principle has certainly come back to haunt the US authorities.
The US government stands accused of failing to target the ever rising cost of US property even though it became obvious, some time prior to the credit crunch, that prices were rising too quickly and to levels which were unsustainable in the medium to longer term.
The expansion of the mandate for Fannie Mae and Freddie Mac which led to a substantial influx of first-time buyers to the US property market, a factor which pushed prices higher and higher and created a number of property bubbles around the country.
The sustained period of low inflation and low interest rates fuelled the excessive demand for finance in general and mortgage finance specifically. This increasing debt culture has seen US consumer debt rise to record levels in a country which was renowned for substantial savings and a rental trend in the property market. The change from a rental culture to purchase culture would appear in many ways to have instigated the eventual collapse in the US property market.
Conclusion
The last few weeks have seen much of the US press concentrate on the changing presidency and the potential change in economic and investment strategies for the future. However, now that President Barack Obama’s inauguration is over it is back to reality for many of the US population and the ongoing downturn in the US economy.
Predictions that the US property market will not turn until possibly as late as mid-2011 do not bode well for homeowners in the country and the US economy as a whole. Substantial rescue packages have yet to kick in, as in the UK, and there are serious concerns that the US economy could be headed for a sustained period of weakness.
However, one of the main ingredients required for any marked upturn in the US economy is confidence from the consumer, but will Barack Obama be able to deliver on this point?