(A) Global Situation and the Larger Market
(A.1) The worst is not over for US housing woes
Industry data released on 6 March 2008 showed that January’s pending home sales in the United States were at the second-lowest reading since 2001.
The National Association of Realtors (NAR) said its seasonally adjusted index of pending sales for existing homes held at 85.9, the same reading as December and just short of a revised record low of 85.8 in August 2007, when the sub-prime mortgage crisis first reared its ugly head.
Meanwhile, the Mortgage Bankers Association said that US home foreclosures and the rate of homes entering the foreclosure process rose to record highs in the fourth quarter led by increasing personal insolvencies. According to NAR’s delinquency and foreclosure survey, the rate of failing loans swelled across most mortgage types but was led by a growing wave of sub-prime borrowers unable to make payments.
(A.2) Home ownership rates fell as buyers are waiting for the crisis to end
Equity Residential, one of the largest US apartment landlords noticed that more people are opting to remain in rental apartments while they wait out the current housing slump. In fact, fewer tenants are moving out of its apartments. The departure rate was 63.3%, lower than the 64.9% recorded in 2006.
And population projections by the National Association of Realtors (NAR) suggest hundreds of thousands of young Americans are sitting out the housing market entirely - neither buying nor renting.
Recent reports show that the average price of an existing single-family home in US metropolitan areas fell 6% in the fourth quarter, while foreclosure rates in the top 100 metropolitan areas soared 78% last year. Indeed, home ownership rates have fallen to 67.8% of households at the end of last year from 69.2% in 2004.
(A.3) US commercial real estate value will also be affected
JP Morgan analysts expect the US commercial real estate values to fall by 20% from the peak of 2007 price height and losses to reach about US$120 billion, or 4% (as compared to the 15% in housing loans) of the US$3.2 trillion outstanding commercial real estate loans.
Commercial Mortgage Backed Securities (CMBS) would account for about US$30 billion of the losses and collateralised debt obligations (CDOs) would account for about US$40 billion of the losses.
CMBS, including CDOs, accounted for 23.6% of lending at the end of the third quarter of 2007. Problems in the CMBS market will become apparent between 2010 and 2012 when many five-year mortgages mature.
This would lead the commercial property market into a more gradual decline than the housing market, which has been slammed by losses related to sub-prime mortgages. Those losses are expected to reach US$200 billion, or 15% of the US$1.25 trillion of outstanding loans.
Sam Gian’s take:
Like they said during the Vietnam War: “the situation will get worse before it gets better”.
The haemorrhage suffered by major global financial institutions has not stopped and the regular blood transfusion is costing the whole world dearly. (The fact that Government of Singapore Investment Corporation GIC is currently in talk with UBS for GIC to inject more funds to help the ailing global financier speaks volume for the crisis portion) The rapid devaluation of the US dollars had driven prices of all major commodities skyward and the troubles are getting closer to home each day with the regional countries surrounding Singapore being clobbered with soaring food prices. The original crisis in the West might take on a new dimension in Asia, that is, security troubles resulting from acute food shortage.
There is no guarantee that the downward spiral would not exacerbate the ongoing problems and plunge the whole world into a sudden and sharp recession. I better be wrong! |
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