Nahraf
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US is still in economic crisis and the job market has not improved. The house price have remained stagnant and may drop. The drop in house price may result in more foreclosures and bank losses.
Further U.S. house price fall may set banks back | Analysis & Opinion |
Further U.S. house price fall may set banks back
Jul 27, 2010 15:58 EDT
case-shiller | Federal Reserve | housing prices
Don’t be fooled into believing the U.S. housing market is rebounding. True, May’s Case-Shiller 20-city house price index bounced 4.6 percent year-on-year. But that was driven largely by a home-buyer tax credit — an artificial one-time stimulus. House prices are still up by nearly half from January 2000. With jobs scarce and confidence falling, a drop looks inevitable. That will test the limits of last year’s bank stress tests.
The $8,000 Federal tax credit for first time home buyers was valid for transactions entered into before April 30, and closing before September 30. So house prices in the three months ending May were given an unnatural boost. Both new and existing home sales have fallen off since April 30, suggesting a fallback in home prices to come.
The 47.3 percent rise in the Case-Shiller index from January 2000 compares with a consumer price index rise of 29 percent over the same period. While the U.S. has enjoyed economic and population growth since 2000, the housing market was already buoyant at the turn of the century, following the strong economy of the late 1990s. A 12 percent drop would bring home prices in line with the decade’s consumer price index rise.
That would further erode confidence and dent consumer balance sheets. It would also ding bank earnings and eat into their capital. Last year’s Federal Reserve-led stress tests assumed a base case housing price decline of 17.4 percent from December 2008 levels in 2009-10 and a more adverse case fall of 27.5 percent. The good news is that U.S. house prices are currently only 2.1 percent below December 2008 levels, so even a 15 percent further decline would take them only to the “base case” level.
However, while unemployment is only at the midpoint between the base case and more adverse case assumptions for 2010, the long-term unemployment rate of 4.4 percent is unprecedented since World War Two. An uptick in joblessness combined with further house price declines would take banks close to the “more adverse case” stress test limits.
If regulators’ calculations on bank capital are correct, that doesn’t presage a banking crisis. The Fed forced the biggest banks to raise sufficient capital to handle a bad-case scenario. But it would hurt earnings — and almost certainly cause banks to become even more cautious about lending. That would make a double dip, doubly bad.
Further U.S. house price fall may set banks back | Analysis & Opinion |
Further U.S. house price fall may set banks back
Jul 27, 2010 15:58 EDT
case-shiller | Federal Reserve | housing prices
Don’t be fooled into believing the U.S. housing market is rebounding. True, May’s Case-Shiller 20-city house price index bounced 4.6 percent year-on-year. But that was driven largely by a home-buyer tax credit — an artificial one-time stimulus. House prices are still up by nearly half from January 2000. With jobs scarce and confidence falling, a drop looks inevitable. That will test the limits of last year’s bank stress tests.
The $8,000 Federal tax credit for first time home buyers was valid for transactions entered into before April 30, and closing before September 30. So house prices in the three months ending May were given an unnatural boost. Both new and existing home sales have fallen off since April 30, suggesting a fallback in home prices to come.
The 47.3 percent rise in the Case-Shiller index from January 2000 compares with a consumer price index rise of 29 percent over the same period. While the U.S. has enjoyed economic and population growth since 2000, the housing market was already buoyant at the turn of the century, following the strong economy of the late 1990s. A 12 percent drop would bring home prices in line with the decade’s consumer price index rise.
That would further erode confidence and dent consumer balance sheets. It would also ding bank earnings and eat into their capital. Last year’s Federal Reserve-led stress tests assumed a base case housing price decline of 17.4 percent from December 2008 levels in 2009-10 and a more adverse case fall of 27.5 percent. The good news is that U.S. house prices are currently only 2.1 percent below December 2008 levels, so even a 15 percent further decline would take them only to the “base case” level.
However, while unemployment is only at the midpoint between the base case and more adverse case assumptions for 2010, the long-term unemployment rate of 4.4 percent is unprecedented since World War Two. An uptick in joblessness combined with further house price declines would take banks close to the “more adverse case” stress test limits.
If regulators’ calculations on bank capital are correct, that doesn’t presage a banking crisis. The Fed forced the biggest banks to raise sufficient capital to handle a bad-case scenario. But it would hurt earnings — and almost certainly cause banks to become even more cautious about lending. That would make a double dip, doubly bad.
