Global house prices

Structural cracks

Trouble ahead for global house prices

OUR round-up of house-price indicators (see table) suggests that any crash is far from universal. Only five countries have suffered annual house-price falls in the latest data and two of those—Japan and Germany—have been in the doldrums for a decade.

This relatively rosy picture may reflect the use of annual, rather than monthly, figures. In particular, the impact of the credit crunch, by restricting the availability of mortgage finance, is having a negative effect on demand. It is a fairly safe bet that the data will look less reassuring in six months’ time.

Some markets have been doing extremely well, even if more uncertainty has crept in lately. Singapore and Hong Kong have benefited from the booming Asian economy. DTZ Debenham Tie Leung, an estate agency, found that the number of homes bought by foreigners in Singapore jumped by 71% last year. Both Singapore and Hong Kong manage their exchange rates against the American dollar. Hence they import American monetary policy, which may be too loose for their domestic conditions. The cheaper real cost of finance encourages more property buying.

Similarly, Spanish and Irish housing probably boomed earlier this decade because of their economies’ fringe status in the euro zone. As a result of the “one-size-fits-all” monetary policy, interest rates in both countries were set too low.

Whereas Irish house prices have been falling, the Spanish numbers still show a small annual increase. But Julian Callow of Barclays Capital reckons that may reflect the way the numbers are calculated: by valuers, who may be cautious about cutting their estimates. Even our figure of 3.8% represents a fall in real terms, since the inflation rate is 4.2%.

Spain and Ireland stand out as economies dominated by housing. According to Goldman Sachs, construction and housing-related employment in both countries made up 13% of all private-sector jobs at the end of last year, against 9% in America and 5% in Germany. Nominal residential investment was 11% of GDP in Ireland and 9% in Spain, against 6% in America.

hat has caused a glut. More than 4m Spanish dwellings have been built over the past decade, according to Britain’s Royal Institution of Chartered Surveyors. Its survey of European property suggests that far more Spanish houses were being built last year than are likely to be needed.

Spanish banks are tightening conditions on mortgages as the number of non-performing loans rises, pricing out potential buyers. As a result, house sales are plunging. The number of completed sales in February was 24.4% below the same month last year, according to the National Institute of Statistics.

Both Spain and Ireland have parallels with the American housing market, where the inventory of unsold homes has hit a 20-year high, according to Capital Economics. There the pace of price decline, as measured by the S&P/Case-Shiller indices, has been accelerating.

Britain is something of an exception. Whereas housebuilding grew by 187% in Spain and 177% in Ireland between 1996 and 2006, the British increase was just 12%. Planning restrictions meant fewer homes were built, which may also explain why house prices in the country have almost doubled, in real terms, since 1999.

Some may take this to mean that British house prices are less likely to fall. But potential homebuyers will undoubtedly be hit by the change in lenders’ attitudes; a sizeable deposit is now normally required. Ed Stansfield of Capital Economics reckons prices may fall by at least 20%.

Two other markets at risk are Australia and New Zealand. Since 1997 house prices have risen faster in Australia than New Zealand, but Goldman reckons that the latter is more vulnerable. Real house prices are 82% higher than they were in the last quarter of 1999, and have risen by 70% relative to household income, the biggest increase in all the countries Goldman has surveyed.

If house-price weakness does spread more widely, there may be important economic consequences. There is plenty of debate about the size of the “wealth effect” of higher property prices on consumer demand. But it will hardly help that fuel and food prices are soaring at the very moment when the value of bricks and mortar looks about to sag

U.S. Initial Jobless Claims Unexpectedly Decline (Update1)

May 22 (Bloomberg) -- Fewer Americans than forecast applied for unemployment benefits last week, indicating companies are reluctant to fire more workers even as the economy slows.

First-time jobless claims fell 9,000 to 365,000, from a revised 374,000 the prior week, the Labor Department said today in Washington. The total number of people collecting benefits was unchanged at a four-year high of 3.073 million for the week ended May 10.

The figures signal that companies are responding to the current economic slowdown by cutting back on hiring rather than letting go of more staff, in contrast to previous downturns. Treasuries, which had fallen before the report, extended their declines after the figures.

``It does give a little bit of space to breathe,'' Beth Ann Bovino, a senior economist at Standard & Poor's in an interview with Bloomberg Television in New York. Still, continuing claims are ``still climbing and that's a little bit scary, meaning that people who don't have a job can't find one.''

Benchmark 10-year note yields climbed to 3.88 percent at 8:44 a.m. in New York, from 3.81 percent late yesterday.

Economists forecast claims would rise to 373,000, from a previously reported 371,000 a week earlier, according to the median of 38 projections in a Bloomberg News survey. Estimates ranged from 360,000 to 380,000.

Four-Week Average

The four-week moving average for initial claims, a less volatile measure, rose to 372,250 from 367,250.

The unemployment rate among people eligible for benefits, which tends to track the U.S. jobless rate, was unchanged at 2.3 percent. Thirty-one states and territories reported a decrease in new claims, while 22 had an increase. These data are reported with a one-week lag.

Federal Reserve policy makers yesterday raised their projections for the unemployment rate and reduced their outlook for growth, a central bank report showed yesterday.

Weekly claims have averaged 357,300 so far this year, compared with an average of 321,000 in 2007, when the economy generated 91,000 new jobs each month on average.

Last week's claims correspond to the week the government surveys businesses to calculate the monthly payroll report. The Labor Department's figures for May employment are due on June 6. The U.S. has lost jobs every month this year so far, including a 20,000 drop in April.

Fed Outlook

Federal Reserve policy makers last month projected the unemployment rate will rise more than they previously anticipated, heightening concern consumer spending will falter, according to minutes of the April meeting issued yesterday.

Central bankers forecast the jobless rate would average 5.5 percent to 5.7 percent in the last three months of the year, up from a January estimate of 5.2 percent to 5.3 percent. Figures from the Labor Department showed the unemployment rate dropped to 5 percent in April.

``The restraint on spending emanating from weakness in labor markets was expected to increase over coming quarters, with participants projecting the unemployment rate to pick up further this year and to remain elevated in 2009,'' the minutes said.

Spending last quarter rose at a 1 percent annual pace, the smallest gain since the 2001 recession. The economy expanded at a 0.6 percent annual rate from January through March and the growth rate for the six months through March was also the lowest since the contraction seven years ago.

Financial services firms have been among the worst hit in recent months as credit markets shrank amid an increase in defaults on mortgages.

Job Cuts

McGraw-Hill Cos., the owner of Standard & Poor's, said May 20 it plans to cut 395 positions in its financial services and education divisions, equaling 2 percent of the company's total workforce. About two-thirds of the reduction, or 246 jobs, will be in the unit that includes S&P.

``We are taking actions to further streamline our operations and lower our costs in the areas most affected by current market challenges,'' Chief Executive Officer Terry McGraw said in the statement. The company already cut 611 jobs, in the fourth quarter of last year.

Soaring fuel costs are also causing some businesses to retrench. AMR Corp.'s American Airlines, the world's largest carrier, said yesterday it will eliminate ``thousands'' of jobs as it drops U.S. routes and retires as many as 85 jets to blunt surging fuel prices and slowing demand.

Pelosi Says Women Won't Suffer a `Step Back' If Clinton Loses

May 22 (Bloomberg) -- House Speaker Nancy Pelosi said women won't suffer a ``step back'' if Democrat Hillary Clinton loses her presidential bid, and rejected the idea of sexism in the presidential campaign.

Clinton, 60, a New York senator, is ``bigger than all of it'' and has shown ``courage,'' Pelosi, a California Democrat, said in an interview with Judy Woodruff broadcast on the PBS NewsHour last night.

``A woman is down to the wire in contention for the presidential nominee,'' Pelosi said. ``You know she still may win this -- but whatever the outcome, new ground has been broken, and it won't be left broken. It will be built upon.''

Pelosi, 68, said the Democrats' delegate-selection process, not the popular vote, will determine whether Illinois Senator Barack Obama or Clinton wins the party's nomination this year.

``The person who has the most delegates becomes the nominee of the party,'' Pelosi said. ``It's not been about the popular vote.''

Clinton, who trails Obama in delegates, is pressing for consideration of popular votes in Florida and Michigan, which she won after the Democratic National Committee stripped the states of their delegates as punishment for moving up their primaries in violation of party rules. Clinton contends that she would hold a popular-vote lead if the two states' results were counted.

Pelosi said in the interview that delegates from both states will ultimately be seated at the Democrats' national convention in Denver in August under a system that will be accepted by both candidates.

Racial Divisions

``It will be done in a way that I think is signed off on by both of the candidates, Senator Clinton and Senator Obama, each of the states, Michigan and Florida, and also by the Democratic National Committee,'' Pelosi said.

Pelosi said she isn't concerned about racial divisions that appear to be reflected in votes in some primary states, and that the outcome of the Oregon primary -- where Obama overwhelmingly won white voters -- provided further evidence that the Illinois senator can appeal to both black and white voters.

``Should he become the nominee of our party with the message of change and what that change means for working families in America, I think those same people will see that their interests are served by a Democratic president,'' Pelosi said. ``It needs to be attended to, but I don't think it's a worry.''

Kentucky and Oregon

Clinton and Obama split the May 20 primaries, with Clinton winning Kentucky by 36 percentage points and Obama capturing Oregon by 17 points.

Obama has 1,962 delegates, according to an Associated Press tally, putting him 64 delegates shy of the 2,026 needed to clinch the nomination. The results from yesterday's primaries left Clinton with 1,779 delegates, or 247 short.

Obama also continues to pick up superdelegates. He's gotten eight so far this week, including West Virginia Senator Robert Byrd on May 19 and Connecticut Representative Joseph Courtney yesterday. That brings his superdelegate tally to 308.5 compared with Clinton's 280.5. In the past two weeks, he has outpaced Clinton in such endorsements by better than 10 to 1.

Pelosi predicted that Democrats will win the White House because of the contrast between the Democratic nominee and presumptive Republican presidential standard-bearer John McCain, an Arizona senator.

She reiterated her skepticism about Obama and Clinton running on the same ticket.

``In all honesty, I do think it is not likely,'' Pelosi said.

Blame Wall Street for $135 Oil on Wrong-Way Betting (Update2)

May 22 (Bloomberg) -- Oil's rally to a record above $135 a barrel came as traders bought crude to cover wrong-way bets that prices would decline, according to data from the New York Mercantile Exchange.

The number of outstanding futures contracts, known as open interest, fell 8.1 percent in a week to 1.36 million at the same time that prices rose 2.6 percent, the data show. Falling open interest and rising prices are signs that traders are buying to exit so-called short positions that would profit if oil fell, and lose money as they rose.

``In a market like today, which is trending higher while open interest is falling, it's a sign that money is moving out of the market,'' said Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania. Open interest in Nymex crude futures peaked this year at 1.5 million on March 13.

Crude for July delivery gained 1.4 percent to a record $135.09 a barrel on the Nymex today. Oil futures, which rose after a government report showed U.S. inventories unexpectedly declined last week, have more than doubled in the past year.

Open interest has been sliding for months, after the number of outstanding crude futures reached a record 1.58 million on July 16, 2007.

`Shrinking Market'

``It is not a growing market, it is a shrinking market in terms of open interest,'' said Olivier Jakob, managing director of Petromatrix GmbH in Zug, Switzerland. ``It is also facilitating the move upward.''

Wall Street banks, hedge funds and other investors have been boosting spending on commodities such as oil for several years. Global investment in commodities rose by more than a fifth in the first quarter to $400 billion, Citigroup Inc. said April 7.

In the last year, non-commercial market participants have raised bets on rising prices, known as long positions, by 37 percent to 263,378 contracts, the Commodity Futures Trading Commission said May 16.

The rush to buy back contracts may be linked to the record number of short positions that had been built up in recent weeks by small-sized speculators, which the CFTC refers to as ``non- reportable'' traders because their holdings are small. Those investors held 123,194 futures contracts betting oil futures would fall in the week ended May 6, an all-time high, and 47 percent more than the number of bets they'd placed on rising prices.

Record Oil

Oil prices have closed at record highs on 27 days so far this year, prompting OPEC oil ministers including Saudi Arabia's Ali al-Naimi to declare that the rally is led by investors, rather than a shortage of supply.

Crude for delivery in December 2016 ended yesterday at $142.09 a barrel, signaling investors anticipate prices will gain for years. Some traders speculate oil will reach $200 this year. The price of a December 2008 option contract that allows the holder to buy 1,000 barrels of crude at $200 each jumped 67 percent in three days to $1.72 a barrel yesterday on the Nymex.

U.S. oil executives told Congress yesterday that prices should be between $35 and $90 a barrel. John Hofmeister, president of Shell Oil Co., the Houston-based subsidiary of Royal Dutch Shell Plc, pegged the proper range ``somewhere between $35 and $65 a barrel.''

Saudi minister al-Naimi said in March when oil was trading near $100 that prices were unlikely to fall below $60 or $70, representing the cost of producing alternatives such as biofuels or tar sands.

Biofuels such as ethanol are the only alternative to crude oil, Sun Microsystems Inc. co-founder Vinod Khosla said in an interview on Bloomberg Radio yesterday.

``The only realistic option that we have, and there is none other, is to use biofuels,'' said Khosla, an investor in ethanol makers. ``There is only one choice.''

U.S. Stocks Advance on Drop in Jobless Claims, Energy Rally

May 22 (Bloomberg) -- U.S. stocks advanced, rebounding from the Standard & Poor's 500 Index's biggest two-day tumble since March, as an unexpected drop in jobless claims overshadowed analyst recommendations to sell shares of Wall Street brokerages.

Exxon Mobil Corp. and ConocoPhillips rallied as oil climbed above $135 a barrel. Wal-Mart Stores Inc. gained after the government report on unemployment claims signaled companies are reluctant to fire more workers, while Apple Inc. advanced on Oppenheimer & Co.'s prediction that demand for new iPhones may top estimates. Goldman Sachs Group Inc., Merrill Lynch & Co. and Lehman Brothers Holdings Inc. retreated after analyst Dick Bove reduced earnings forecasts on concern the brokerages will fail to fully hedge against credit losses.

The S&P 500 added 3.08 points, or 0.2 percent, to 1,393.79 at 9:38 a.m. in New York. The Dow Jones Industrial Average advanced 24.84, or 0.2 percent, to 12,626.03. The Nasdaq Composite Index increased 12.76, or 0.5 percent, to 2,461.03. Five stocks climbed for every two that fell on the New York Stock Exchange.

``It's hard to keep your attention away from commodities and energy,'' Jeffrey Davis, who helps manage about $4.8 billion as chief investment officer at Lee Munder Capital Group in Boston, told Bloomberg Television. ``You can't avoid the fact that it's driving the markets right now.''

Seven of 10 industries in the S&P 500 gained after the government said initial jobless claims decreased by 9,000 last week. Stocks tumbled yesterday after the Federal Reserve signaled it is done cutting interest rates and record oil prices threatened to reduce profits at consumer companies.