WASHINGTON -- Conditions at the epicentre of the credit crunch are getting worse as Ben Bernanke and the U.S. Federal Reserve Board appear poised to slow their aggressive drive to cut interest rates. Home prices are falling faster in virtually every major U.S. city and foreclosures are on a pace to double over last year, according to two reports released yesterday.
There is also mounting evidence consumers are feeling the squeeze from slumping house values, rising gas prices and lenders increasingly wary of financing their high-spending ways.
This latest grim economic news comes as the Fed, where Mr. Bernanke is chairman, is expected to announce today that it's lowering its benchmark lending rate by a quarter percentage point to 2 per cent, and then may not cut again for a while. The Fed, which winds up a two-day rate-setting meeting in Washington, is leaning toward a pause in its rate cuts as it assesses the impact of its efforts to fix the credit crisis, economists said. The U.S. central bank has already cut its key interest rate by a total of three percentage points since the start of the credit crisis last summer.
The decision comes as the heart of the credit mess - housing - continues to be a major source of trouble for investors, lenders and homeowners. House prices fell 2.6 per cent in February, and are down nearly 15 per cent from their July, 2006, peak across the country, according to the Standard & Poor's/Case-Shiller index of the 20 largest cities.
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"There is no sign of a bottom in the numbers," David Blitzer, who heads S&P's index committee, said bluntly.
Prices were down in all but one of the markets surveyed - Charlotte, N.C. And out of the 20 cities in the survey, 17 reported record annual declines. Miami and Las Vegas, which experienced a burst of speculative building during the housing boom, led the way with annual declines of 22.8 and 21.7 per cent, respectively. Prices are also down sharply in California - Los Angeles (off 19.4 per cent), San Diego (19.2 per cent) and San Francisco (17.2 per cent). Particularly worrying, the pace of home price devaluation is picking up. Prices fell 2.6 per cent in February, compared with 2.4 per cent in January.
Prices have now retreated to where they were at the end of 2004, the 20-city index shows. That means that a growing number of homeowners owe more than their properties are worth.
"The deflation trend shows no signs of turning, let alone ebbing," agreed Michael Gregory, senior economist at BMO Nesbitt Burns.
The combination of slumping prices and a wave of mortgages resetting to higher rates is proving toxic for the most indebted homeowners.
The number of U.S. homes heading toward foreclosure more than doubled in the first quarter from a year earlier, as weakening property values and tighter lending left many homeowners powerless to prevent homes from being auctioned to the highest bidder, according to RealtyTrac Inc. of Irvine, Calif.
The foreclosure problems closely track declining home prices. Nevada, Florida and California are experiencing the worst foreclosure rates.
Across the United States, 649,917 homes received at least one foreclosure notice in the first three months of the year, up 112 per cent from 306,722 during the same period last year, RealtyTrac said. Lenders also repossessed 157,000 homes.
RealtyTrac monitors default notices, auction sale notices and bank repossessions. One of every 194 households is now in some stage of foreclosure.
The problem left few parts of the country untouched. Foreclosure filings are up in all but four states.
The deepening housing slump is also showing signs of hitting consumer sentiment, and behaviour.
The U.S. Conference Board reported yesterday that American consumer confidence fell to the lowest level since the start of the March, 2003, invasion of Iraq. The index fell to 62.3 in April from 65.9 in March.
MasterCard chief executive officer Bob Selander told investors on a conference call that it's seeing evidence that more consumers are putting food and gas charges on their credit cards, while fewer are buying luxury items.
Meanwhile, executives of Wal-Mart Stores Inc. pointed the finger at lenders, who they say are increasingly unwilling to extend credit to maxed-out consumers.
"People don't have as much access to credit as they used to," said Wal-Mart USA CEO Eduardo Castro-Wright, speaking at a Lehman Bros. retail conference broadcast over the Internet. "Clearly that is having an impact on how consumers behave."
And without easy access to credit, he said, consumers are finding it has become more difficult to splurge on non-essential or big-ticket items.
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