$Stock*Shop*Charts*News*Option$

[Stock Lobster]

TofL: Henry Paulson warns US house prices must plunge

Dearbail Jordan
From Times Online
March 26, 2008

The US Treasury Secretary gave warning today that there is more pain ahead in the American housing market after he said prices must be allowed to drop before the economy can stabilise.

Henry Paulson’s remarks to the US Chamber of Commerce sent the Dow Jones industrial average plunging by 130 points to 12,402, as investors forecast more months of turmoil ahead. It recovered a little to close down 109.74 at 12422.86.

Mr Paulson said that policymakers were aware it was a housing downturn that fuelled turmoil in the financial markets, and that a slowing housing market posed the biggest risk to the economy.

Mr Paulson acknowledged that the Government would step in to lessen the impact on the economy, but he was emphatic that the house price cycle must run its course.

“A correction was inevitable, and the sooner we work through it, with a minimum of disorder, the sooner we will see home values stabilise, more buyers return to the housing market and housing will again contribute to economic growth.”

It emerged yesterday that house prices in 20 US cities had declined by 10.7 per cent in the 12 months to January — the worst fall in more than 20 years.

This month US consumer confidence fell to a five-year low.

Mr Paulson also said that regulation governing commercial and investment banks needed to be re-examined and strengthened, after the collapse of Bear Stearns, the Wall Street bank.

He said: “This latest episode has highlighted that the world has changed, as has the role of other non-bank financial institutions and the interconnectedness among all financial institutions.”

Mr Paulson added: “These changes require us all to think more broadly about the regulatory and supervisory framework that is consistent with the promotion and maintenance of financial stability.”

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3627054.ece

Have your say

Mr Paulson is talking sense that a correction in prices is needed before buyers will return. Hence there should be no need to lower interest rates, just let prices fall to sensible levels and stabilise. Once that has happed economic growth will pick up again, but the Fed *must* avoid making the same mistake of generating another bubble by leaving rates too low.


Paul, Coventry,

Dear Mr. Webber. You are right when you say that the housing market are tied to the supply and demand, the problem is that you don't realise that the market in London is been manipulated. The supply is been held with red tape to keep the prices inflated and the city itself from renovating. London is a city that would rather crumble over itself and become dust then renovate. I don't know why and, at this stage of the game, I couldn't care less.

Fabio C, London, UK

Why should house prices be tied to econonmic growth? They are tied to supply (limited by the green belt in London) and demand (increased through the larger number of two income families and immigration into London from the rest of the UK and Europe).

If these change, house prices will drop.

Gareth Webber, Swanley, Kent

As a UK resident who "invested" his pension lump sum in the Florida realty boom a few years ago I am very interested in any helpful advice.
In just the last year I have lost $1,500,000 and still cannot sell any of the homes or building lots. Investors like me have made things worse, but it is a turkey shoot out there. In the long term the investments are great, but after rental income it costs over 5% of value a year in mortgage, tax, lawn care, pool care, etc. So when I plot 5% costs against potential growth it is clear that it's time to sell realty and buy gold.
Cave emptum



Bruce Lennox, Box, UK

How long will it be before we see this sort of frank and honest comment from the Brown administration?

This is all part of the business cycle - we have been through an irrational boom and now we need to go through a period of contraction - house prices need to fall and some banks and other financial institutions need to fail. The sooner Brown & Co recognise this and define the scope and limitations of government intervention, the sooner this recession can play out and the economy can begin to grow again.

Rob W, London,

The growth of house prices in the US from 1999 to December 2007 over reached the level of economic growth of that period.

Using a base of $100 000 for the price of a home in 1999 the price had increased to $300 000 by the end of 2007 and this takes into account the decline in house price trends during 2007.

If the increase in house prices were correlated with the rate of economic growth from 1999 to 2007 then $100 000 would have increased to about $170 000.

With a slowing rate of economic growth in 2008 to what may be less than 1% for 2008, the market correction could result in a 30-40% decline in the price of homes. It is impossible for the Federal Government to compensate for for this correction as it would have to spend trillions of dollars.

It is also important to remember that an investment in a home is a long term commitment and over the full term will realise its value.

Gregory, Tunbridge Wells, Kent

If you repeat a big enough lie often enough, eventually people believe it...

Peter P, litchfield, UK

In other words, we will bail out the Wall Street banks who caused the problem in the first place by cynically inflating the housing bubble, but clueless (and powerless) homeowners can go hang!

dan, London, UK

Compare Paulson's open and honest appraisal with the weasel words of Alistair Darling during his budget speech and the metronomic repetition that we get from Gordon Brown of how well the economy is doing in the UK, when nothing could be further from the truth.

figurewizard, petersfield, hampshire