The big fear concerning the US economy relates to
house prices. The debate mirrors the arguments put forward in the UK a while ago: will
they crash, or will there be a soft landing? If they crash, a US recession could follow,
that’s how serious this is.

And now news out of the US reveals that over the last year, the median house prices
fell 2.2 percent. Two percentage points hardly makes a crash, but because this has been
recorded over a full year, many have been spooked. A drop over a month or two can be
explained away as a temporary blip, but a fall sustained over a year – and remember the
rate of interest was much lower at the beginning of this period – is much more serious. In
fact, it was the first annual fall seen in eleven years. And remember, a national average
does not tell the full story. In some regions, the reductions were more severe, perhaps
already at crash proportions.

Home sales are down Stateside too. Sales of existing homes in September fell at an
annualised rate of 6.18 million, from August’s 6.3 million.

Some good news was lurking in the report, however, there has been a reduction in the
number of buyers too.

Ultimately, in the US, as is the case with the UK, the market’s fate depends on how
willing home owners are to stay still. If they put any idea of moving on hold until the
cycle swings in their favour, a crash will probably be avoided. But, if the cost of
financing the mortgage forces then to downsize, as happened in the UK in the early ’90s,
then prices will tumble.

In the UK, a crash in house prices has been avoided because home owners have
stayed away. So that, after taking into account immigration, supply has been lower than
demand. But that doesn’t mean the cost of funding a mortgage isn’t worryingly high. It is.
And how long can people avoid moving?

© Investment & Business News 2013