US property upturn boosts markets

On May 10th, the CAC 40 rose by almost 32% from its recent all-time low. We should refrain from rejoicing too soon, however. Since its June 1st 2007 high, when it reached 6,168 points, instead of 59%, the CAC 40 is now losing “only” 46% of its value. News interpreted as an improvement in the property market are at the heart of this dramatic upturn in the markets.
Foreclosures on sales of homes have triggered hysteria amongst traders. However,
a closer look reveals that the figures have been inflated considerably by sales of property seizures. According to the Zillow Real Estate Market Reports, “over the last twelve months, one property sale out of five (20%) is a seizure and on one out of six (17%) the capital to be repaid is higher than the price of the house”.
The impact on the standard of living of American citizens is immense. For years now, property has been the cash cow of the American consumer. Each new property price rise has been an excuse to re-borrow against the real value of the house. This process of “equity withdrawal” has allowed American households to continue to maintain a high level of consumption. However, when property prices fall, this little game is no longer possible with an overall mortgage of 10,500 billion dollars (7,700 billion euros) that exceeds the value of the goods mortgaged (around 8,500 billion dollars, that is 6,300 billion euros, according to T2 Partners).
Even more serious is that the problems companies are encountering are resulting
in the termination of commercial leases and in the end, by the sale of commercial premises (offices, warehouses, etc.), whose owners find themselves in exactly the same situation as American householders.
And where the plot thickens is that commercial property loans represent in total almost two and a half times more that the subprime loans which hit the headlines in 2007 and 2008 (more than 4,000 billion dollars, (2,9000 billion euros) as against 1,500 billion dollars for the subprimes, (1,100 billion euros). Add to this the Alt-A loans at around 2,300 billion dollars (1,690 billion euros), and you have a time-bomb waiting to explode.