America’s housing market on the brink of collapse

The same problem that triggered the world’s economic decline in 2008 is again threatening to derail the global economy.

That problem is the American housing market, and in so far as helping it, the US government is just about out of moves.

In fact, some experts believe the government should just let it crash and get it over with. But the domino effect that might cause around the world is frightening.

In July, the number of house sales fell 27% compared with June to the lowest level in 15 years. It’s a problem that stems from the country’s near record-high unemployment rate of 9.6%.

America’s middle class is suffering with many people either out of work or taking pay cuts. This is placing huge stress on mortgage repayments, with many already late or on the verge of default.

Banks are gradually forcing these people to sell their houses so they can get all or some of their money back.

But so far banks have been reluctant to put a high number of ‘mortgagee sales’ on the market for fear that they will drive prices down.

The problem is that even the few houses that have been put up for sale have been struggling to get buyers. Currently, the average house takes about a year to sell, and home values have already fallen by 30%.

This is due to the problem at the other end – a lack of buyers. Americans are feeling poor and insecure job-wise, so they are reluctant to commit themselves to large-scale purchases like houses that require a lot of bank debt.

So with an increased supply of houses for sale and a lack of demand from buyers, the only way for prices to go is down.

If that happens – even by as little as 10% – a lot more Americans will be forced to sell their houses as per their mortgage agreements, meaning they will be out of a home and a great deal poorer.

Consumer spending will then drop and businesses will have to lay off more staff, making the unemployment problem even worse. Altogether it will trigger a painful downward spiral towards a shrinking economy.

The US government has tried to prevent this by providing an US$8,000 tax credit for first-time homebuyers and $6,500 for repeat homebuyers, plus mortgage modification programs, low-interest rates, government-backed loans and other assistance programs.

This has kept the housing market from falling through the floor after the sub-prime mortgage crisis, as a lot of buyers were quick to take up the tax credit offer.

But this ran out in April and the economy hasn’t picked up enough to fuel buyer demand on its own.

Last week, Obama’s housing secretary Shaun Donovan said they might bring in another tax credit, but that idea was quickly dismissed by the White House who aren’t keen to spend another $30 billion on something that might not work.

Most now feel these “spend and pretend” or “delay and pray” programs have run their course and offer little hope.

Even the Home Builders association says a new tax credit will only raise demand if it’s at least $25,000 per buyer. And with America’s soaring government deficit, this is highly unlikely to get support from the White House or Congress.

What Obama did announce on Monday is a new $50 billion plan to upgrade the country's roads, railways and airports in an effort to create jobs and improve the lagging infrastructure.

The strategy here – just as it was with last year’s $800 billion stimulus package – is to make Americans wealthier so that homeowners don’t have to sell and buyers feel rich enough to buy.

But Obama still has to get this plan through Congress, and Republicans are defiant in blocking anything he or his Democrats introduce as a way of improving their chances in November’s midterm elections.

And even if the plan does get through, a lot of the jobs won’t be created until 2011, perhaps too late for the weakening American economy and housing market.

If the plan doesn’t work, an American housing crash will mean bad news for the world economy.

Declining demand in America (on top of the declining demand in Europe and Japan) will hurt China’s factories who export most of their goods to the West.

They will be forced to lay off staff, unless consumers in China and other emerging countries can start buying more of their own goods, which is looking unlikely.

And with growth in China, India and Brazil fuelling the world economy, a slowdown in these countries will remove the last remaining source of economic hope.

It’s not a pretty picture. And though many are reluctant to say it for fear of triggering a self-fulfilling prophecy, the damage may already be done to America’s middle class.

If that proves true, then the problem that created this mess – the American housing market – is about to strike again. And this time the consequences will be a lot worse.

By The Casual Truth