America’s hidden housing disaster: Gottliebsen

We are seeing some good American corporate results reflecting the remarkable talents of US executives and their ability to adapt their companies during tough times. There are also encouraging signs emerging in the US economy, but if you drill deeper you discover that there remains a rotting core. At the moment the excess liquidity on Wall Street and the US corporate talents are papering over this bad core.

And, as you will see below, that bad core may affect the world in ways that we will find unpleasant.

A Bloomberg weekend story quoted three leading analysts warning of mounting foreclosures. Analysts from Amherst Securities Group LP in New York say a “shadow inventory” of seven million properties are in the foreclosure process or likely to be seized – up from 1.27 million in 2005. This could mean US home prices will resume falling.

Standard & Poor’s pace of prime and so-called alt-A loan defaults is accelerating as subprime defaults slow. More than $400 billion of the US home mortgages that were packaged into securities and sold by companies other than government-supported Fannie Mae and Freddie Mac are in default and may be foreclosed on. Those defaults may depress home prices for years, the Standard & Poor analysts said.

David Lowman, head of JPMorgan Chase & Co’s mortgage unit says we haven’t seen the peak of the number of people who can’t pay their mortgages, and that’s going to “weigh on us for some time to come”.

Behind those statements from key figures in the US real estate market are a string of depressing figures, particularly in the western states and Florida. While US housing is depressed, American consumers will be saving rather than spending.

America is not going to have any widespread recovery. By contrast, in Australia we are seeing rising house and sharemarket prices which is transforming the outlook.

You may remember that back in July I was talking with an old US friend who operates in the mortgage business. Four months ago he was facing the day-to-day situations that led to the trends the analysts are now picking up. Last night he sent me an email doing the rounds in the US.

“The new American Pledge of Allegiance: children, I pledge allegiance to America’s debt, and to the Chinese Government that lends us money. And to the interest, for which we pay, compoundable, with higher taxes and lower pay until the day we die”.

Americans don’t usually joke about such matters but my friend is seeing misery at every turn and my guess is that personally the value of his house has been savaged. I have not discussed his personal affairs but almost certainly he is saving more.

The average American is looking for a scapegoat and China is at the head of the queue. Frustration with the Chinese is going to increase pressure on politicians to act. Given the sharpness of the collapse during the crisis, we are going to see some rises in consumer spending and home building coming out of it, but don’t bet on the US consumer to drive American profits forward in 2010 and beware of a rise in anti-Chinese feeling in the US.

Finally, I suspect that the American banking industry has not provided for the prospect of an extended period of tough times.

This article first appeared on Business Spectator.