US housing slump raises hopes of second cut in interest rates in eight days

The hope of a second cut in interest rates in eight days from the US Federal Reserve helped steady frayed nerves on the world's stockmarkets last night, after a day of jittery trading prompted by concerns about global recession.

Renewed evidence of the depths of the housing slump in the US left Wall Street convinced that the US central bank would follow last week's 0.75 percentage point reduction in its base lending rate with another half-point cut tomorrow night.

The prospect of a fifth cut in US interest rates since September put downward pressure on the dollar and pushed investors into the safe haven of gold, which rose to a record level of $929.20 an ounce during London trading yesterday.

An early rally on Wall Street arrived too late to spare European bourses from the knock-on effects of big overnight falls in Asia, although losses were pared back after the steady start in New York. Shares in Hong Kong, Tokyo and Shanghai all had hefty falls on fears that exports from the region would suffer from a US slump.

The FTSE 100 clawed back some of its losses after the start of business in New York but still closed 80.1 points lower at 5788.9. On Wall Street, the Dow Jones industrial average was 100 points higher, with traders convinced that the Fed had no choice but to cut rates to 3% in view of data showing new home sales down by more than a third on a year earlier.

Dimitry Fleming, an economist at ING Financial Markets, said: "No matter which way you look at it, the December new home-sales report is simply awful." In December, demand for new homes dropped 4.7% month on month to an annual rate of 604,000 - the lowest level since February 1995.

He added that in the three months to December, new home sales fell at an annualised rate of 35% and for 2007 as a whole were down 26% on 2006 - the weakest performance since official figures were first collected in 1963.

The biggest declines were in the south and west - regions unaffected by the bad weather in the east and the mid-west.

Charles Dumas, of Lombard Street Research, said: "US new homes-sales data for December today reinforced the likelihood of at least a consumer recession."

Cuts in interest rates make the dollar less attractive to investors than higher-yielding currencies. Yesterday the euro rose 0.8% to $1.4790, its fourth gain in five trading sessions.

The dollar also lost ground against the pound. Sterling edged up from $1.9825 to $1.9860 but fell against most other currencies after David Blanchflower, a member of the Bank of England's monetary policy committee, said interest rates in the UK were "restrictive". Blanchflower said in a Guardian interview yesterday that focusing too much on inflation was "like fiddling while Rome burns".

Home prices in 10 cities drop a record in Nov

Home prices in 10 major metropolitan areas fell a record 8.4 percent in the year through November, suggesting the housing slump is worsening, according to a Standard & Poor index released on Tuesday.

The decline in the S&P/Case-Shiller Home Price Index topped the 6.7 percent annual drop for October and was deeper than predicted by economists at Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. The consensus was for a 7.1 percent fall, Goldman economists said.

Home prices across big cities have now declined for 11 consecutive months and show little sign of bottoming, said economists, including Robert Shiller, a founder of the index and chief economist at MacroMarkets LLC. The decline in the index accelerated to 2.2 percent in November over October, from 1.4 percent in the previous month, S&P said.

It "confirms our outlook that the housing shock is by no means over," said Michelle Meyer, an economist at Lehman Brothers in New York. "Home prices are falling in response to weak demand, which is a function of buyer sentiment and tight credit conditions."

Falling U.S. home prices in the past year have fueled rising delinquencies and foreclosures, with homeowners unable to get out of costly loans. Banks and investors, throttled by losses in risky mortgages, have sharply curtailed financing for all but the most credit-worthy borrowers.

A broader but newer index of 20 cities recorded an annual decline of 7.7 percent in November, S&P said. Miami and San Diego led with annual declines of 15.1 percent and 13.4 percent respectively.

"While the sharpest decline in home prices has decidedly been in the once-hot regions such as Miami and San Diego, the weakness is spreading throughout the nation," Meyer said in a research note.

Other double-digit year-over-year declines were in Las Vegas, Detroit, Phoenix, Tampa and Los Angeles.