Tuesday, October 9, 2007

Comments from S&P About the Housing Market – Bad News to Continue for Some Time

Comments about the housing market from the chief economist at the S&P suggests that we are still not halfway through the slump so there is more bad news to come. From CNNMoney.com:

The U.S. subprime crisis is likely to get worse, dragging down U.S. economic growth, the chief economist of Standard & Poor's said Tuesday.

"The panic has subsided but the housing market has not hit bottom yet. It will not hit bottom until winter. Housing prices won't hit bottom until next summer and the losses won't peak for another two years, until 2009," said David Wyss at a press briefing in Mumbai. "We are not halfway through this crisis yet." How can market hit bottom this winter, prices hit bottom the summer of 2008 and still be incurring losses through 2009? What about the inventory of new and existing homes on the market?

S&P forecasts the U.S. economy to grow 2 percent in 2007 and also in 2008, while the global economy is expected to grow 3.6 percent and 3.5 percent in the same period.

"We are looking at another year of sluggish growth and that's consistent with an uptick in the unemployment rate to 5 percent," Wyss said.

However, credit losses stemming from the U.S. subprime crisis have not been that great, he said.

The U.S. Federal Reserve estimates that credit losses resulting from the U.S. subprime crisis are approximately $150 billion, less than 1 percent of the $16 trillion U.S. mortgage market.
This is a lot of losses to absorb. With all the announcements of losses recently, it is no where near $150B.

Wyss also said he expects the U.S. Federal Reserve to cut its funds rate by another quarter-percentage point by the end of 2007.

The Fed cut its benchmark interest rate target by half a percentage point to 4.75 percent last month after a weak August payrolls report and amid the summer doldrums in financial markets.
However, the strong September numbers and a revision in the August numbers have led some market participants to discount the chances of another rate cut in the near term.

Wyss said he expects financial markets to remain strong overall.

"If they were expecting a recession, the drop in earnings would more than offset what the Fed is doing," he said. "The fact that stock markets are strong shows financial markets are heading for expansion."

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