Expert View: One condo-flipping crisis doesn't make a recession

This weekend is officially the end of the summer holidays in the US, and equity markets appear to believe that when the big investors return to their desks, they will be buyers rather than sellers.

This might seem surprising, given the relentless tide of doom and gloom over the past few months, but as the old saying goes, bull markets climb a wall of worry. It's when everything looks wonderful that you need to worry. Like back in April.

As I wrote in a recent column, predictions of economic disaster tend to originate from the bond and currency markets, and smart equity investors recognise that these tend to have something of an agenda.

They know, too, that the information they get from companies is often more up to date than the top-down data that drives much of the more general sentiment. A classic example is the US housing market. This is currently centre stage among the doom-mongers: the bursting of a property bubble, it is said, will be the curtain-raiser for a widespread US recession. The story is fed by macro-economic data on falling home sales and fewer new houses being built, to which is added a dose of anecdotal evidence.

But, of course, the equity market has known about this for a long time; US housebuilding stocks fell in value by almost 50 per cent between January and July. When Toll Brothers, a builder of upmarket "MacMansions", came out with yet another profit warning last month, the stock actually rallied, suggesting it is now "in the price".

There is undoubtedly a bubble bursting: a random search on the wonderfully named website condoflipper.com found one development in south Florida with around $100m (£52m) of unsold apartments, and there are clearly many more. Indeed, the aggregate data on inventory suggest there is something in the order of $170bn of unsold developments in the US as a whole.

If we assume housebuilders will have to discount or provide incentives to shift this inventory, the cost to the industry could be $50bn. That's a staggering figure, but before we get carried away, remember that everything about the US economy is on a large scale: GDP is over $12 trillion.

The rise in short-term US interest rates over the past year and a half is undoubtedly the reason for the demise of "condo-flipping". But at the last count, and here is the key, 76 per cent of US mortgages were fixed-rate deals for between 15 and 30 years. Even better, as long-term interest rates fell, households refixed their mortgages at ever lower rates, with little or no penalty.

The remaining 24 per cent of mortgages are more like those in the UK, and these homeowners will have to pay higher rates - probably around 1 per cent more than last year. Not good, but still manageable.

This refinancing has driven another myth - that the US householder "has been using his home as an ATM" and that, without this effect, consumer spending will collapse. Except, as the Federal Reserve suggests, only around 15 per cent of the $1 trillion of mortgage equity withdrawal actually went on increased consumption. The rest went to refinance existing debt and fund small businesses.

Housing was responsible for around 40 per cent of US employment growth between 2001 and 2005, and there is naturally talk of mass layoffs now. Less well known, however, is that housing-related employment has contributed only around 13 per cent of the total since 2004. In effect, the housing market helped the US survive the recession of 2000-02 but has ceased to be the key economic driver.

A housing bubble-driven recession in the US? I don't buy it; nor it seems do equity investors.

Mark Tinker is a director of Execution Stockbrokers. Mark.Tinker@Executionlimited.com

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