WHEN the UK's biggest building society warns of setbacks ahead in the housing market, we should sit up and listen. When the warning coincides with news pointing to a second-wave slump in the world's biggest housing market, we should listen very carefully indeed.
For the past few months, commentators have been happy to pick up on the upbeat house price numbers from the Nationwide. Its latest survey said house prices in October were 2 per cent higher than a year earlier – the first annual rise for 19 months.
We sighed with relief over these house price performance numbers. Not only did the slump in the housing market appear to be over, but the great plunge in house prices also looked to have been avoided.
But can we be certain? The latest statement from Nationwide is not so reassuring. It has just reported a big slump in profits – down 62 per cent on the level reported a year ago. Chief executive Graham Beale warns that "we expect the remainder of this year and next to present a very difficult trading environment.
"Much of the increase in prices this year has been caused by an unusually low level of properties available for sale rather than a robust recovery in house purchase transactions."
He added that high unemployment and the continued squeeze on lending meant "setbacks" in house prices in the future would not be surprising. This would be accentuated if more sellers emerged and interest rates rose quicker than expected.
This warning has particular resonance in the light of unfolding problems in the US. Like Britain, America's housing market looked to be heading for recovery. Like Britain, massive support has been pumped into mortgage lending institutions. And, like Britain, America's recovery is dogged by rising unemployment. What appeared to be encouraging signs of recovery are now being snuffed out by a climbing jobless total which is forcing up arrears and foreclosures. Unemployment is a lag indicator and most commentators are agreed our jobless total will continue to climb towards three million next year. Could these developments in America be an ominous pointer to what lies in store for Britain?
According to the US Mortgage Bankers Association (MBA) last week, more than one in seven US borrowers were behind on their mortgage payments or facing foreclosure at the end of the third quarter – the highest rate on record.
The percentage of loans in foreclosure or with at least one payment overdue rose to 14.4 per cent, the highest since the MBA began records in 1972 and a rise of more than a percentage point since the second quarter. Late payments and defaults have carried on rising in spite of the end of the US recession. The reason is that unemployment continued to edge towards 10 per cent during the quarter. As Jay Brinkman, MBA chief economist, tartly observed: "Job losers continue to increase and drive up delinquencies and foreclosures because mortgages are paid with pay cheques, not percentage point increases in GDP."
Over the year unemployment in the US has risen by 5.5 million, increasing the number of loans with payments at least 90 days late and driving up the rate of new foreclosures from 1.07 per cent to 1.4 per cent.
In recent quarters the importance of unemployment in the mortgage crisis has been illustrated by the increase in foreclosure starts on traditional prime fixed rate loans.
This marks a worrying new phase in the foreclosure crisis that governments here and in the US may find difficult to address. Traditional prime fixed rate loans accounted for one third of all foreclosure processes started in the third quarter, and they were 44 per cent of the quarterly increase in completed foreclosures.
These loans are more conservatively written than sub-prime mortgages. Loose lending standards during the boom meant that the first stages of the housing crisis were most keenly felt in this area.
Could the US economy have a strong recovery in GDP, asks veteran Wall Street watcher Ed Yardeni, without a similar recovery in housing starts? He doubts it. He notes that home prices are down sharply along with interest rates. However, the availability of mortgage credit remains restrained and the unemployment rate is unusually high.
Furthermore, the Federal Housing Administration (FHA) recently started to tighten its standards on mortgage loans that it will insure. Also, the overhang of foreclosures is putting a damper on home price increases.
The tax credit for first-time buyers was set to expire on 30 November, until it was renewed and expanded until 30 April just last week. One would think that there might have been a last-minute burst of mortgage applications in early November by those homebuyers perceiving that the credit might not be available after the end of November. Instead, mortgage applications for new and existing homes plunged 32 per cent over the past six weeks to 13 November to the lowest pace since the late 1990s. That is not a reassuring sign.
Here in Britain there have been warnings in recent weeks that the housing market may not follow through on its apparent recovery this summer and may be due a relapse.
The economist David Blanchflower, a former outspoken member of the Monetary Policy Committee, has persistently warned of the need for a price "correction" of 30 per cent or more. Few share his view that a shakeout of this magnitude is required. But renewed weakness may now be in store.
According to the property website Rightmove, house asking prices dropped this month and will continue falling for the next two months ahead of the traditional spring buying season. The group's commercial director Miles Shipside expects three months of asking price falls, before a tentative recovery in the spring, likely followed by pre-election jitters.
Against a darkening background of rising taxes and looming public expenditure cuts, with jobs being lost in the public sector, prospects in the housing market are not as good as they seemed just two months ago. And weakness here would almost certainly spill over into household confidence and consumer spending. The day after tomorrow may not be as rosy as once it seemed.
