CBA 0.70% $87.80 commonwealth bank of australia.

housing market article *** interesting ***

  1. 3,567 Posts.
    Worth keeping an eye on the US housing market
    Aug 25
    Barrie Dunstan

    Last week, Connecticut fund manager and analyst Bridgewater Associates made a courageous forecast.

    "The residential real-estate market has been in an explosive rally since 1998 but in our estimation this is about to end," it said.

    But why should Australian investors worry about the fate of United States home owners? Part of the reason, Bridgewater says in answering US investors who ask "how big a deal will this collapse be?", is that the effect will probably be "pretty big."

    The US economy is more dependent on housing and households are more leveraged to house prices than ever before. On Bridgewater's figures, house prices have risen in real terms by about 38 per cent in the past seven years.

    With the jump in US bond yields in the past two months, housing affordability has taken a knock. The spread between US long-term bonds and the cash rate is between 4 per cent and 5 per cent - an 80-year high point - and rates on a new home loan are now 14 per cent higher than three months ago.

    In the US, housing activity is driven by mortgage refinancing and this demand continues as long as interest rates keep falling, making it easy for consumers to switch to a lower rate (and even cash in on some of their housing capital gains).

    Fiduciary Trust International's head of global real estate, Jack Foster, says after September 11, 2001, Americans were looking for safety and, with low interest rates, they rushed to buy their own homes. But with interest rates rising, he says signs are starting to signal caution, with US house builders buying back housing stocks rather than land.

    In addition, he warns that investment property fundamentals are collapsing: office vacancy rates are now more than 17 per cent but, despite this weakness, property prices haven't collapsed.

    He doesn't see a dramatic collapse in property prices but he suspects that, when the downturn does come, the Bridgewater "call" will look "pretty sharp".

    The big question for investors around the world is: can the US economy withstand a drop in the housing market - and a potential rise in short-term interest rates now being factored into the market?

    The 10-year yield on US Treasuries has jumped more than 26 per cent since June 30 from 3.54 to 4.47 per cent on Friday and ABN Amro strategist Gerard Minack is tipping these yields could rise to 5 per cent.

    For share investors, the question is whether this rise in long-term interest rates is a warning or a bullish indicator. The bullish argument is if the bond market is this worried, it must think economic growth is going to continue strongly.

    Minack thinks that, with the US bond market in its present mood, further good economic news will cause traders to push bond yields even higher. But as a confirmed bear, he says, "ultimately I expect that this will all prove to be a mistake as growth subsides as this year's unprecedented policy stimulus fades".

    In the meantime, rising bond yields might not necessarily translate into immediate downward pressure on recovering world stockmarkets.

    London-based international strategist David Fuller notes that historically, falling bond markets often have provided stockmarkets with additional liquidity for a further rally of about six months as investors rebalance portfolios by selling some long-dated bonds in favour of shares.

    But, he warns that "when bond yields continue to rise, often against the background of higher short-term rates as well, confidence in stockmarkets is undermined". His message is that investors should monitor the US bond market closely.
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