Property crisis in US deepens

The crisis gripping the US property market was made bare on Aug. 15 in figures showing a slump in home sales and a collapse in confidence among builders. Defaults on US home loans have caused a credit crunch which is reverberating around the world as billions of dollars in liabilities flow through the global financial system. Stock markets on both sides of the Atlantic swung wildly from hour to hour. In London, after dropping by 100 points at one stage, the FTSE 100 index closed down 34 at 6,109. In New York, a late plunge sent the Dow Jones Industrial Average down 167 points to 12,861, below 13,000 for the first time since April. Poorer households in the US are struggling to keep up repayments on risky, so-called sub-prime mortgages. The National Association of Home Builders said sentiment in the construction industry was at its lowest for 16 years. Its index of confidence, with a midpoint of 50 for a neutral outlook, fell 2 points to 24 during July. Estate agents painted a similar picture. Quarterly sales of existing homes dropped by 10.8 percent according to the National Association of Realtors, with falls in 41 of 50 states. The US Federal Reserve injected $7 billion of short-term financial liquidity into the banking system. But rumors about problems at the United States' biggest home loans firm, Countrywide Financial, triggered a fifth successive bloody day. On foreign exchanges, sterling was under pressure as investors lost their appetite for the so-called yen carry trade, which involves the purchase of high-yielding assets by borrowing in Japan, where interest rates are low. The unwinding of carry trades pushed the yen higher against all other currencies. Michael Woolfolk, a currency strategist at The Bank of New York Mellon, said: "High-yielding currencies are having a really hard time against the yen. We are in the middle of a credit market crisis in the US, and the truth is that European banks have a lot of exposure to this very same market. The euro and also sterling will keep getting pounded." Casualties continued. KKR Financial, an affiliate of private equity firm Kohlberg Kravis Roberts, admitted it was likely to lose $200 million to $250 million on disastrous $5 billion forays into mortgages. It complained of "disruptions" and "volatility" in obtaining credit. The biggest to see red was Countrywide Financial. Hit by a "sell" recommendation from Merrill Lynch, its shares dropped 12 percent. Countrywide has admitted more than 5 percent of its mortgages are "delinquent," and Merrill said it could face bankruptcy if liquidity worsened.