A report published yesterday by the Joint Economic Committee (JEC) of the US Senate and House of Representatives estimated two million sub-prime homes could go into foreclosure this year and next. This would have a detrimental effect on the country’s property market, driving down prices, the JEC claimed.

The report said $71 billion (£34.6 billion) in housing wealth would be lost across America as foreclosures can reduce the value of a property. Surrounding homes could be affected to the tune of $32 billion. A study of house values in Philadelphia quoted in the report showed an abandoned property lowered home values within 150 feet by an average of ten per cent and those within 450 feet by an average of five per cent. A ten per cent decline in US house prices would lead to a $2.3 trillion economic loss, according to the report.

The end of easy credit

Chris Burvill, head of UK equity income and manager of the Gartmore Cautious Managed Fund, said the wider ramifications of the summer’s credit crisis – a result of the US sub-prime troubles – were set to rumble on. He said the ‘era of easy credit’ was now over and warned investors may be facing further market unrest.

Burvill added, ‘Even if we see no further Northern Rock-type problems with banks and other mortgage lenders, we are not going back to where we were in terms of the availability of credit. This poses important questions about how well the economy can perform in 2008 and whether or not the stock market rally in September really takes account of an increase in economic risk. Currently, there is a “don’t look down” air about markets, which doesn’t look sustainable.’

Improving sentiment

Simon Ballard, credit strategist at ABN AMRO Asset Management, said recent clarity about the fallout from the US mortgage crisis had helped improve investor sentiment.

‘We have been saying for a while that the key to re-building investor sentiment would be transparency on financials’ exposure to sub-prime and liquidity issues,’ he explained. ‘It is much better for risk appetite in general to get whatever bad news there is out in the open. The reaction in the credit and equity markets of late would seem to suggest they agree.’

However, Ballard warned against complacency at this point, as he believes there is still a question mark over how much more bad news there could be for investors. ‘We certainly do not believe that this is the end of the story,’ he said.

‘Following the Fed rate cut last month, generally buoyant company earnings, the recovery in global credit markets and the advance of equity indices to all-time highs, anyone returning now from three months on a desert island might ask: “What crisis?” Nevertheless, there is still potential for renewed spikes in market volatility,’ he concluded.