Summit News

Lehman sees housing downturn lingering

NEW YORK (Reuters) - The U.S. housing market downturn could linger for years but probably does not pose a major risk to the overall economy, Lehman Brothers’ chief global fixed-income strategist said on Monday.

“The subprime saga will not be sufficient to derail the U.S. and world economy,” Lehman’s Jack Malvey said at the Reuters Investment Summit in New York.”

Malvey said the U.S. economy, despite some recent volatility, is in the midst of a “benevolent cycle” and that the current “great moderation” could run into the 2009-2012 period before risks for a U.S. and global downturn pick up.

Still, Malvey said U.S. housing prices could fall into 2009 to 2011 by an average of the mid- to high single-digits, returning to levels last seen in early 2005.

“This issue will continue to shadow markets,” he said, adding the prolonged downturn “so far doesn’t seem to be the stuff of a significant recession in the making.”

Malvey said the subprime mortgage crisis that blew up in February had not completely played out, and that foreclosures “are probably going to accelerate.”

“The problem will be for all the homeowners who thought they could roll over into another teaser adjustable rate mortgage” but find that credit standards have been tightened, he said.

An exaggerated view of the potential spillover effect of the subprime saga was one reason that many traders miscalculated on likely Federal Reserve interest rate policy for 2007, Malvey said.

Those bets have been unwound recently, with prospects for one or more Fed rate cuts, as reflected in rate futures prices, subsiding rapidly over the past month.

There is “a tiny possibility” that the Fed could raise rates this year, but the most likely outcome is that rates will be held at 5.25 percent before a possible rate cut in 2008, Malvey said.

In contrast to the Fed, the European Central Bank has another “two or three” tightenings ahead, while the Bank of England could raise rates another 50 basis points, he said.

To start anticipating a rate hike Malvey said the market would “need to see a concern .. that inflation expectations have risen and that the Fed has to deal with that psychology.”

A sharpening of Fed rhetoric on inflation over the next few months “could do the trick” on tamping down expectations without the need to actually raise rates, he said.