We all know the US housing market is in a state of disarray – but what is unclear is the extent of this mess. Is housing in the US set to fall through the basement? Is a crash already under way, or are we witnessing a temporary slide?

The most often quoted source of information on the US housing market is the National Association of Realtors (NAR). It publishes data on both existing home sales and median price of existing homes, broken down by region. If you listen to some, all hell has already broken loose. One commentator recently said median prices of houses in the US are now 18 per cent down from March of this year. If that is true, then right now the US is in the midst of a horrendous crisis. It’s just that we can find no evidence to support this claim.

In fact, right now, NAR has the median price standing at $211,700, compared to $220,900 a year ago. That’s a fall of 4.2 per cent. Median price peaked in June this year, at $229,200 – that’s 7.64 per cent up on the September price. So all in all, the last three months have been disastrous, but not as bad as some are saying.

Perhaps a more pertinent comparison would be to contrast today’s median price with the price from a few years ago. Back in 2004, the US rate of interest increased from 1 per cent in May to 2.25 per cent in December. So that was the last year in which rock bottom interest rates were available and in that year median house price stood at $195,400 – still 7.11 per cent up on the price seen last month.

This is a significant comparison, because many of the people who bought homes in that year will have seen the cost of repaying the loan escalate over this time period. Should these same people find they also face negative equity, then the implications for the US would appear to be very serious. It seems difficult to imagine how the US could avoid recession, even a nasty recession, when millions of home owners face the double whammy of mortgage payments that have increased severalfold, while their home is worth less than what they paid for it.

Will things get that bad? Here the runes are mixed. In September, sales of existing homes were down 8 per cent, and are now sitting at their lowest level in 9 years. So with sales so low, it seems reasonable to assume prices will fall further. A lot further.

And yet NAR remains quite sanguine. Its chief economist, Lawrence Yun, said, “The good news is that mortgage availability has markedly improved in recent weeks, with interest rates on jumbo loans falling, and more people are applying for safer and conforming FHA mortgage products. Some of the cancelled transactions will move forward as buyers apply for other loans.”

Mr Yun also says the median price has been distorted, because there were fewer transactions at the upper end of the price spectrum.

So maybe things are not quite as bad as the data suggests.

But that’s on a national scale. In some regions, things are a lot worse: in the West, median prices are now 11.49 per cent down on the peak price seen just two months earlier. That’s a massive drop in so short a timeframe. And in the Northeast things are almost as bad, with prices down 10.68 per cent since the June peak.

But, perhaps things are at their most serious in the South. The fall from peak of $189,500 seen in June to $174,400 in September was the equivalent of 5.5 per cent: not as bad as elsewhere, but more seriously in 2004, median price was $170,400, just 2 per cent higher than the price in September just gone.

Of course, in some cities within the region things are much worse.

Hope comes in the shape of the Fed. Later this week Ben Bernanke and his chums at the US central bank will be deciding the rate of interest for the next month. It seems certain rates will be reduced. The debate seems to be over whether we see a quarter or a half per cent cut. If it’s a half per cent, then things will soon get an awful lot easier for mortgage holders.

The snag with all this though is that there seems to be this assumption Stateside that the Fed holds a magic wand. That it can slash interest rates whenever things get tough, and then make things better.

In the short-term there is an element of truth in this, but in the longer-term things are not so clearcut. With inflationary pressures growing worldwide, and with the dollar falling like a rock from the north, there is a real danger that US inflation will build up, and what the Fed does now could come back and haunt the US in the months, and years, ahead.

The falling dollar is helping US competitiveness, although the market is being distorted with Europe feeling the brunt of the dollar’s falls. But, if inflation starts to pick up, then some of the benefits of a lower dollar will be lost.

Perhaps the fundamental point is this. In the UK and Eurozone, central banks’ main responsibility is to keep inflation down. In the US, the Fed has a dual responsibility: it’s to keep inflation and unemployment down. But, many believe, in the longer term keeping inflation down also has the effect of keeping unemployment down. So, it could be argued that the Fed has a short-termist agenda.

Mind you, it is worth putting things in to context. In the US the median price is now $211,700, and mean price $257,800. That’s the equivalent of £103,000 and £126,000. Now, if house prices were that cheap in the UK, things would be very different over here, right now.If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

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