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US housing still in doldrums
Tue, 24 May Pre-Open

The housing market in the US is where it all began. The increased money lent to subprime borrowers and the web of complex derivatives woven around them all exploded and triggered the global financial crisis. That was in 2007. It is 2011 and the housing market in the US is still far away from a significant recovery.

At the height of the crisis, housing in the US had hit rock bottom. The US Fed's subsequent quantitative easing program helped matters a bit. With low interest rates and a housing tax credit, another fall in housing was arrested. But this was not expected to continue for long. The tax credit expired last year and the Fed has signaled its intention of completing the QE program by June this year. And this has had a negative impact on housing only highlighting that the so called recovering in the housing market was largely propped up with no real improvement in fundamentals.

Fathom this. As published in the Economist, house prices dropped 3.3% in the year to February according to the S&P/Case-Shiller index. This was the fastest decline since November 2009. The Federal Reserve's preferred measure, the CoreLogic house-price index, showed an even worse one-year decline of 7.5% in March.

This does not bode well for an already beleaguered US economy. Weakness in the housing market means lower construction activity which in turn means lower job opportunities. For an economy which has witnessed persistently high unemployment rate for quite some time now, the problems posed by the housing market have only made matters worse. Not just that, as house prices fall, paying mortgages becomes more difficult and defaults rise. This also means reduced disposable incomes at the hands of the average American leading to lesser consumption. Indeed, if there are more jobs in the US, then there will be better response in terms of making mortgage payments which will in turn improve the fortunes of the housing industry.

Thus, it would be interesting to see what the Fed chooses to do post June. Will it go for another round of quantitative easing called QE3? Or will its halt its program and go in for austerity measures in an effort to trim its debt? Either ways, the US recovery going forward is expected to be long and painful.

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