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US House Prices at One Third of Their 2001 Value
By The Anglo American | August 16, 2008
It only takes 240 ounces of gold to buy a US house. There has never been a better time to melt the jewelry. In gold terms, an average US house price has dropped to one third of its 2001 value.
Europe is also beginning to feel the destructive wind that has torn through the US housing market. A study released by the Royal Institute of Chartered Surveyors shows that most European housing markets are in steep decline. And Ireland and Germany are leading the way. The UK house prices are in retreat after many years of explosive growth and Spain is thought to follow suite by the summer. Cyprus and Iceland were the only countries bucking the trend.
However, this decline is not driven by a European sub-prime market failure. It does, however, suffer from a hangover from the US sub-prime party. If you look at some major British banks they have had significant exposure to US sub-prime world. HSBC is nursing a debt from its US operations of $17.2 billion dollars. Barclays Bank did not just get into trouble with these securities; they bought a US sub-prime lender. Regions Bank, the US retail bank, sold the Equifirst Corp. to Barclays for $225 million in early 2007. Equifirst then added many times that to the debt columns on Barclay’s balance sheet.
There are some wise owls in this conservative Midwest bank.
The consequence is to bring Europe, full circle, back to the US headache - the credit squeeze. Because of the continuing doubt concerning bank assets related to mortgages, banks are not lending money to each other. The collapse of the first British bank in over century, Northern Rock, was an early casualty. Despite having a healthy prime loan book, they borrowed heavily on the interbank system to facilitate their mortgages. They simply did not have enough deposits to service the debt. The cost of borrowing to cover that debt put them out of business.
So how healthy is your bank?
Take, for example, a look at Regions Bank again. A cursory glance at their 2007 fourth quarter earnings suggest that their $95 billion loan book is matched by their $95 billion deposits. This is a bank that is clearly not playing the dice as Northern Rock did. But if you wanted to borrow money from them, Regions will have to borrow money from the same place as the failed British Bank. So it is not going to be cheap.
A look at your bank’s balance sheet is not a bad place to start before you apply for that loan.
* (Data by Tim Lee of pi Economics as reported in the Financial Times).
©The Anglo American 2008
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