US housing market yet to find a bottom

The bottom of the United States housing downturn is not yet visible, while rising inflation is making it tougher to set monetary policy to keep the lid on prices without imperiling financial stability, said the International Monetary Fund.

"With delinquencies and foreclosures rising sharply and house prices continuing to fall, a bottom for the housing market is not yet visible and the credit deterioration is spreading to even prime mortgage loans," said Jaime Caruana, director of the IMF's monetary and capital markets department.

"We consider this market is still at the centre of this turmoil and some of the valuations still depend on where this housing market finds a bottom," he told a news conference.

Still, Caruana said falling house prices may make homes more affordable, which could eventually stabilise the US housing market.

The IMF said global financial markets were still under immense pressure, with US bank losses from the sub-prime mortgage crisis exceeding the amount of capital they are able to raise and lending conditions tightening even more.

"Global financial markets continue to be fragile and indicators of systemic risk remain elevated," the IMF said in an update of its semiannual Global Financial Stability report. "With inflation risks on the rise, the scope for monetary policy to be supportive of financial stability has become more constrained," it added.

The IMF, which estimated in April that losses in US assets due to the fallout from the sub-prime crisis could reach $1 trillion (Dh3.67trn), said it had no reason to adjust that figure. "We think this figure is probably right," said Caruana.

The IMF called for "a clear and permanent solution" to deal with problems and oversight lapses at US mortgage lenders and financiers, including Fannie Mae and Freddie Mac. It said house prices were also softening in other advanced markets including Spain, Ireland and Britain and there were rising concerns over future loan losses in the mortgage, construction and commercial property areas.

Jan Brockmeijer, deputy division chief, said it was tougher to evaluate the exposure of European banks to the crisis in US sub-prime mortgages – extended to borrowers with poor or spotty credit histories, many of whom became delinquent on loan payments – because they are slower to disclose losses than their American counterparts.

"Their disclosures are less rapid so information for 2008 is more patchy and less clear to make categoric judgment on that, but as the crisis is unfolding and becoming broader, the impact will be felt more elsewhere," said Brockmeijer.

The IMF said emerging markets were weathering the financial and credit market turmoil, but investors were closely watching some countries' policies to combat rising inflation.

Caruana said it was important that emerging markets properly deal with inflation.

"If they don't do it promptly they will have to do it later, and perhaps more intensely, but also we think that financial markets will discriminate among those countries that do not take the proper measures," he said.