Finance ministers and central bankers from the Group of Seven nations gathered in Singapore today with a U.S. housing slump clouding the outlook for world economic growth.
Sales of U.S. existing homes have declined every month since G-7 officials last met in April, and the National Association of Realtors predicts house prices may decline in the remaining months of 2006, which would be the first year-over-year drops since 1993. The International Monetary Fund yesterday branded the slowing U.S. housing market a ``key risk'' to expansion.
``With the world's most dominant consumer likely to retrench in the aftermath of a bursting of its housing bubble, the rest of the world can hardly be expected to sidestep this blow,'' said Stephen Roach, chief economist at Morgan Stanley in New York.
Andrew Cates of UBS AG calculates the U.S. generated 25 percent of global growth in the second quarter. The 12-nation euro economy accounted for 16 percent, China 13 percent and Japan 10 percent.
The US model of economic growth is based on consumption; Consumer spending is responsible for 70% of US growth. In addition, the rest of the world has become addicted to the US model of growth. Therefore, when the US model looks like it's in trouble, the world has problems.
G7 countries aren't the only ones worried about the US housing market. Earlier this week, the IMF warned about the US housing market:
The slowdown in the U.S. housing market could be sharper than expected, which would hurt the U.S. economy, global growth and financial markets, an official from the International Monetary Fund said Tuesday.
While expectations are that the U.S. will follow the example of housing markets in Australia and the U.K., where a slowdown in housing was orderly, there is a risk that the U.S. slowdown could be more severe, said Hung Tran, deputy director of the IMF's international capital markets department.
The hope is that there will be a soft landing, but there are risks on the downside, which if occurred, would "produce weaker-than-expected U.S. growth with negative implications for global growth and financial markets," he told reporters.
Asked about the most vulnerable segment of the U.S. housing market, Tran singled out sub-prime mortgages -- which generally carry interest rates higher than 8 percent and are designed for people who can't qualify for traditional mortgages because of low income or poor credit.
"Indeed, we have seen that the delinquency rates among sub-prime borrowers have started to increase from a very low base and (are) still very low historically, but (they) have shown an increase in recent months and again that is the area of potential vulnerability," he said.
In addition, industry insiders expressed concern about the housing market in Senate testimony earlier this week:
``We certainly have not bottomed out yet,'' Tom Stevens, president of the National Association of Realtors, said during testimony before a Senate committee accessing the risks to the economy from a possible collapse in housing. ``Prices will continue to decline.''
The four-member industry panel testifying before a joint hearing of Senate banking subcommittees agreed that states with the biggest increases in prices over the last couple of years, such as Florida, California, and Nevada, were more at risk for declines. Still, the 56 percent surge in home values nationally over the last five years upped the odds that prices would drop overall, they said.
``The scope (of the gains) does cause some concern,'' Richard Brown, chief economist at the Federal Deposit Insurance Corporation, the government agency that administers the deposit insurance system, said. ``It's really unprecedented.''
Asked by Sen. Jack Reed, a Rhode Island Democrat, if he agreed with some forecasts that prices as measured by Ofheo would drop 3 percent in the next year, Lawler said it was ``certainly something that could happen, and is a matter of concern for us.''
Right now we have no idea how the housing market will shake out. News this week (lower month over month inflation growth) may allow the Federal Reserve pause in their interest rate program at this week's meeting. Oil prices have dropped as well. If oil continues its recent trend or remains at current levels, consumer finances may get some breathing room from energy prices. However, US consumers are already heavily in debt with no pay gains for the entire expansion. That alone may hamper increases in consumer spending, which the US economy needs expand.
In short - we still have no idea how this will play out.