If the state of US housing is a big “known unknown”, we now know a little more. Freddie Mac’s second-quarter results provided more data points adding to one fear – pain is spreading through the housing market.
A $320m provision for credit losses helped slash earnings for the country’s second-largest mortgage agency by almost half, year on year. That is worrying, given that Freddie Mac does not accept subprime or jumbo loans. Freddie Mac may be well positioned to weather the storm but it sees weaker conditions stretching into next year and delinquency rates are creeping up across the country.
The market had to digest other bad news on Thursday. H&R Block, which makes most of its money helping Americans fill out their tax returns, reported a big quarterly loss on the back of, you guessed it, its struggling Option One Mortgage business. Worse, plans to offload the division to Cerberus Capital Management have also run into trouble. Meanwhile, data from Freddie Mac’s regulator on Thursday showed nominal house prices rising at their slowest pace since the early 1990s. In real terms, they are falling. That reinforces the negative message given this week by the decrease in the Case-Shiller index.
The backlog of unsold existing US homes now stands at more than nine months’ worth of sales. Yet prices remain high relative to incomes after so many years of gains, and credit has been tightened or turned off completely for a significant proportion of the market. The peak in adjustable-rate mortgage resets is still to come. All that adds up to further falls in house prices. The danger is that this, in turn, hits consumption – and, by extension, profits and employment – and makes lenders even more nervous, touching off further downward pressure on house prices. Freddie Mac and its peers may have quite a few gloomy quarters to come.