**[investwise]** If Housing Fails, Then What Sector Would Survive?

 

The state of the US housing market has probably been the last thing on your mind. But it would be a mistake to ignore the startlingly grim data that we've seen this week from across the Atlantic. The US government has been trying hard to prop up the housing market. But one flagship scheme has just ended - in a real heap. And another isn't working at all well. What does it mean? Well, if you're looking to snap up a piece of State side real estate, you can probably afford to wait a while longer. But more importantly, the ultimate fallout is likely to stretch way beyond the US. Here's why...   The US government's housing bail-out has failed Since the US housing bubble burst four years ago, Americans have got used to seeing bad tidings on the property front. A mix of falling sales and foreclosures has seen home prices nationwide collapse. They're down more than 30% from their mid-2006 peaks up to the end of March, according to the S&P/Case-Shiller Composite-20 index. April's Case/Shiller number is out on Monday. But however this turns out, the latest dire property news has completely stolen its thunder. Sales of new single-family homes plunged by a third in May to a seasonally-adjusted annual rate of 300,000. Why? Well at first glance, the biggish sales drop isn't a big shock. The US government has tried to shore up the property market by giving $8,000 tax credits to first-time buyers. And people were happy to take advantage. Indeed, $27m alone was doled out in fraudulent claims (including $9m to prisoners who were actually in jail while they said they were buying a house - who says crime doesn't pay?) Anyway, that scheme stopped at the end of April, so a May sales drop was already on the cards. But the devil is in the detail. Sales in both March and April were revised down sharply. So "there must have been a wave of cancellations", says David Rosenberg at Gluskin Sheff. And not only was that May figure much lower than expected, it was the lowest since records began back in 1963. Sales plunged right across the country. On top of that, May's median sale price was down almost 10% from a year earlier and the lowest seen since December 2003. And despite US builders cutting their inventories to the lowest level in 39 years, the stock of unsold homes was still equal to 8.5 months' supply at May's sales pace. That's the highest in nearly a year. In fact it took builders a record 14 months to find a buyer for a completed home last month. It all means "the next few months are likely to be very grim", says Ian Shepherdson at High Frequency Economics. He's right. Already we know that home loan applications for new purchases in June's first three weeks are 15% lower even than May's. Repossessions are set to soar too And it's not just the outlook for new house sales that's scary. Existing borrowers are facing growing problems too. Last week saw fresh bad news on HAMP. The 'Home Affordable Modification Program' is President Obama's scheme to stop over-indebted borrowers losing their homes, by reducing their home loan payments. But it's not working out well at all. More than a third of the 1.24m borrowers who enrolled in HAMP have dropped out. That's higher than the number of people who've actually managed to have their loan payments cut. When HAMP started, the Obama administration put pressure on banks to take on borrowers without first insisting on proof of their income. When banks have tried later to collect this information, many troubled homeowners have been disqualified or have dropped out. In other words, it's back to the original sub-prime problem - lending to people with incomes far too low ever to service their debts. What's more, the majority of people who really need help from HAMP aren't eligible. In the first quarter of this year, 5.7m borrowers were at least 60 days late on their home loan payments - i.e. they'd missed two or more payments. But only 30% of these qualify for HAMP, says Mike Shedlock of globaleconomicanalysis.com. That means that "4m delinquent borrowers are stuck." And many of those who do get help will still end up slipping back "into default and head for foreclosure. Many who successfully keep their house would be better off if they lost it. HAMP was a failure and another huge wave of foreclosures is coming down the road". In short, US housing is going from bad to worse. As more borrowers default and go into foreclosure, lenders will be forced to unload more repossessed houses onto an already weak market. That will create a vicious downward house price spiral. So if you're looking to snap up a piece of State side real estate, you can probably afford to watch it get even cheaper. More dodgy debts are on the horizon for US banks But there are far wider implications. Another wave of housing defaults means another wave of dodgy debts for US banks. Yet financial markets aren't really plugged into this. Bank analyst Meredith Whitney called the credit crunch pretty much right first time round. "Most investors aren't baking in a housing double dip," she says. Yet it means that "banks will have to post additional loan-loss reserves" - more write-offs. And that will curb lending even more. Add in job cuts by state and local governments - see this week's magazine for more (Could we soon see a US state go bust?) - and it'll be a "rough second half" for the US economy, she says. As America suffers, global economic confidence and stock markets are likely to be hit hard. And where the S&P 500 goes, the rest of us tend to follow. It all spells particularly dangerous times for investors. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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