Markets in meltdown

Growing housing crisis fraying consumers' nerves; sales plunge and credit turmoil spark stocks rout

Jacqueline Thorpe, Financial Post

Published: Friday, July 27, 2007

"We have had the most pronounced credit market cycle in U.S. economic history," said David Rosenberg, chief North American economist at Merrill Lynch. "It has powered the bull market in equities and the prosperity in the economy. Sales of new homes plummeted 6.6% in June to an annual rate of 834,000. That followed news on Wednesday that existing-home sales dropped 3.8% to 5.73-million units.

The figures, combined with ongoing turmoil in the credit market, led to a global stock market rout. The Dow Jones industrial average fell 2.3%, or 311.50 points. The United States now has 4.73 million houses on the block, an inventory of a near-record 7.5 months, said Michael Gregory, senior economist at BMO Capital Markets.

The oversupply in the condo market in Miami is now so intense that Mark Zandi, chief economist at Moody's Economy. Consumer confidence is lower now than in the months immediately preceding each of the previous two recessions, Mr. Rosenberg said.
With more than half the mortgage equity withdrawal from the housing boom going toward purchases of big-ticket items, sales activity is bound to slow as prices fall.

"One of the key things that has driven consumer spending all along has been mortgage equity withdrawal," Mr. Gregory said.

Credit conditions for consumers are only likely to get tighter as a whole wave of mortgages are reset at higher rates.

Meanwhile, the credit woes in the subprime market are causing credit conditions to tighten in the corporate world. Mr. Rosenberg notes there has been a 100-basis point widening in the spread between high-yield bonds and government debt and the pain is starting to spread to better quality credit.