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New credit crunch looms

Telegraph
October 24, 2007

Fresh turmoil in the global debt markets has set off sharp falls in commodity prices and high-risk assets as investors scrambled for safety.

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The dollar soared as US investors liquidated foreign holdings, ending at $1.4129 against the euro and £2.0276 against the pound, in one of the most dramatic currency moves this year.

Libor spreads in Europe’s interbank market jumped to 64 basis points, roughly the level that set off the credit crisis last summer and prompted a liquidity rescue by the European Central Bank. The iTraxx Crossover index that measures spreads on corporate bonds has jumped 100 basis since last week to 364 yesterday.

“It’s the summer that won’t end,” said Peter Berezin, a strategist at Goldman Sachs.

He said investors were shaken by last week’s drop in US home-builder sentiment to an all-time low and by fresh falls in the ABX index for sub-prime debt. “We continue to learn that it pays to respect the sell-offs in ABX and housing-related credit. This has elements of the February and August sell-offs, where credit markets signalled problems,” he said.

The lowest tier of ABX debt has fallen to a record low of 20.72 – from par of 100 – pointing to huge losses that have yet to surface.

Wall Street yesterday avoided a repeat of Black Monday, eking out a recovery after the Dow’s 368-point dive on Friday. The fall-out triggered tumbles in Tokyo, Shanghai, Hong Kong, Indonesia, Korea, Taiwan, and Turkey. Lead, copper, zinc, and nickel all fell hard on growing fears of a global economic slowdown, while gold dropped $13 to $754 an ounce. Brent crude fell 61 cents to $83.18.

There are concerns that a $75bn (£37bn) rescue operation put together by US Treasury Secretary Hank Paulson to stabilise the sub-prime market is intended to mask the scale of the crisis.

“This rescue has back-fired,” said Hans Redeker, currency chief at BNP Paribas. “The central banks don’t want anything to do with it. There is a fear that the big four US banks are trying to hide their debts,” he said.

The US market for asset-backed commercial paper (ABCP) contracted a further $11bn last week as lenders refused to roll over short-term debt. This form of paper has shrunk by 25pc since August, cutting off almost $300bn of funding.

Dr Suki Man, an analyst at Société Générale, said “shutters” had gone up across the debt markets. “Has it just got ugly again? The jury’s out, but it’s enough to make one feel the chill. All this is offset by a US economy still expected to grow by more than 2pc, and China and India still growing at breakneck speed,” he said.

Mr Redeker said yesterday’s dollar spike was caused by US investors pulling money out of Turkey, South Africa, Hungary and other emerging markets. They had invested $300bn in bonds and stocks over the last year.

“This is just profit-taking on risky assets. The dollar is going to fall further because long-term funding for US assets has collapsed since the sub-prime crisis,” he said.

Outgoing IMF chief Rodrigo Rato warned yesterday that the adjustment may be brutal. “An abrupt fall in the dollar could either be triggered by, or itself trigger, a loss of confidence in dollar assets,” he said.

Existing U.S. homes sales plunge in largest decline since 1999
Sales of Existing Homes Fall by Largest Amount on Record in September

AP
October 24, 2007

WASHINGTON (AP) — Sales of existing homes plunged by a record amount in September as turmoil in mortgage markets added more problems to a housing industry in its worst slump in 16 years.

The National Association of Realtors reported Wednesday that sales of existing homes fell 8 percent in September, the largest decline to show up in records dating to 1999. The seasonally adjusted annual sales rate of 5.04 million existing homes was also the slowest pace on record.

The weakness in sales translated into further pressure on prices. The median price — the point at which half the homes sold for more and half for less — fell to $211,700 in September, down by 4.2 percent from the sales price a year ago. It marked the 13th time out of the past 14 months that the year-over-year sales price has decreased.

The 8 percent decline in sales was bigger than the 4.5 percent decline that had been expected.

Analysts blamed the bigger-than-expected slump on the turmoil that hit credit markets and mortgage markets in August as worries increased over rising mortgage foreclosures.

Those worries resulted in a drying up of the availability of so-called jumbo mortgages, loans over $417,000, which are particularly important in high-cost areas such as California.

“Mortgage problems were peaking back in August when many of the September closings were being negotiated and that slowed sales notably in higher priced areas that rely more on jumbo loans,” said Lawrence Yun, senior economist for the Realtors.

By region of the country sales were down 10 percent in the Northeast, 9.9 percent in the West, 7 percent in the Midwest and 6 percent in the South.

The slowdown in sales meant that the inventory of unsold homes rose to 4.4 million units in September. At the September sales pace, it would 10.5 months to eliminate the overhang of unsold homes, a record length of time.

Economists are worried that the huge levels of unsold existing and new homes will put further downward pressure on prices.

Yun said that the price declines should be put into perspective in that they are occurring after a five-year housing boom which pushed prices up to record levels.

He forecast that prices will decline by about 1.5 percent this year. That would be the first annual price decline on Realtors’ records going back four decades.

The troubles in housing have been a drag on overall economic growth, increasing worries that the housing slump and related credit market troubles could become so severe that they will push the country into a recession.

However, many private economists believe that the Federal Reserve, which cut a key interest rate for the first time in four years last month, will continue cutting rates in a campaign to make sure that the weakening economy does not tumble into a full-blown recession.

Analysts said the price declines will worsen in coming months until inventories are reduced to more sustainable levels. Ian Shepherdson, chief U.S. economist at High Frequency Economics, predicted that the housing troubles will prompt the Fed to cut rates by a quarter-point at its meeting next week.

“The housing crunch is accelerating. The Fed can’t stand by and watch,” Shepherdson said.