Analogies Abroad
From the Wall Street Journal:
Overseas Analogies
By JUSTIN LAHART
"Ever since the U.S. housing slowdown became apparent last year, investors have cast a wistful eye toward the United Kingdom, hoping its soft landing will be a prelude to a similar experience on this side of the Atlantic."
"As in the U.S., Britain's housing market looked like it was overheating a few years ago -- then kept heading up. When the U.K. market stalled last year, the Bank of England took the precaution of cutting its key interest rate, helping to stabilize its housing market. If it happened in the U.K., why couldn't it happen in the U.S.? In a speech earlier this month to bond investors, none other than Alan Greenspan, former Federal Reserve Chairman, pointed to the potential parallel. But the analogy might not be perfectly apt."
"Mortgages in the U.K. are closely tied to short-term interest rates, while U.S. mortgages are generally linked to longer-term interest rates. That gives the Bank of England more direct influence over the U.K. housing market, since central banks control short-term interest rates, while market forces drive long-term rates. The Fed could reduce its short-term lending rate and long-term interest rates could keep rising on, say, mounting inflation worries, putting strain on the housing market."
"Australia's housing market may have avoided trouble for a similar reason -- commodity prices boomed last year, and Australia is above all a commodity producer."
"Finally, while prices in the U.K. may have gotten even more excessive than in the U.S., U.S. households put themselves more at risk than their U.K. counterparts by borrowing against home equity to fuel spending, notes Goldman Sachs economist Jan Hatzius. British households were burned by this in the early 1990s, he says, and thus were more conservative than Americans this time around."
"Of course, this doesn't mean the U.S. housing market is bound for a hard landing. But it does mean investors should be careful about taking too much comfort from analogies abroad."
Overseas Analogies
By JUSTIN LAHART
"Ever since the U.S. housing slowdown became apparent last year, investors have cast a wistful eye toward the United Kingdom, hoping its soft landing will be a prelude to a similar experience on this side of the Atlantic."
"As in the U.S., Britain's housing market looked like it was overheating a few years ago -- then kept heading up. When the U.K. market stalled last year, the Bank of England took the precaution of cutting its key interest rate, helping to stabilize its housing market. If it happened in the U.K., why couldn't it happen in the U.S.? In a speech earlier this month to bond investors, none other than Alan Greenspan, former Federal Reserve Chairman, pointed to the potential parallel. But the analogy might not be perfectly apt."
"Mortgages in the U.K. are closely tied to short-term interest rates, while U.S. mortgages are generally linked to longer-term interest rates. That gives the Bank of England more direct influence over the U.K. housing market, since central banks control short-term interest rates, while market forces drive long-term rates. The Fed could reduce its short-term lending rate and long-term interest rates could keep rising on, say, mounting inflation worries, putting strain on the housing market."
"Australia's housing market may have avoided trouble for a similar reason -- commodity prices boomed last year, and Australia is above all a commodity producer."
"Finally, while prices in the U.K. may have gotten even more excessive than in the U.S., U.S. households put themselves more at risk than their U.K. counterparts by borrowing against home equity to fuel spending, notes Goldman Sachs economist Jan Hatzius. British households were burned by this in the early 1990s, he says, and thus were more conservative than Americans this time around."
"Of course, this doesn't mean the U.S. housing market is bound for a hard landing. But it does mean investors should be careful about taking too much comfort from analogies abroad."
2 Comments:
Note: Remember that mortgage spreads to Treasuries can blow out, so in the instance of a market dislocation where there is a "flight to quality" in to Treasuries, you can still see mortgage rates stagnate in the face of a Treasury market rally.
"what is more telling is the few that do go under contract, they are coming back on the maket, as either the buyers change their minds, or they cannot get the financing from the banks etc."
I'm seeing this as well -- houses that were past Attorney Review and "Under Contract" come back on the market 3 to 4 weeks later.
I wonder if those who bailed managed to get away with their deposits.
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