US housing crash could set off a chain reaction
The dotcom crash and the terrorist attacks of 2001 sparked the recession in the US that was only lifted by a spending spree fueled by Americans using their houses as cash machines. They've been borrowing against the rising equity in their homes, much like the situation in the UK, but now with a flooded property market many believe the cycle has reached its peak and it is time to reassess the market.
Although properties have doubled in value in some areas, including Hawaii and Florida, there is trouble on the horizon as seventeen successive interest-rate increases to August 2006 have slowed borrowing. The US national average 30-year mortgage rate was 6.63% in August 2006 against 5.81% at the end of 2004. Add the rising cost of energy, and many homeowners will soon find themselves in debt.
The statistics back up the gloom in the US.
- Average time to sell existing home: 6.3 months
- Average time to sell new home: 6.1 months (an eight-year high)
- Median price rise for a new single-family home in the year end June 2006: 2.3% (smallest rise since December 2003)
Meanwhile, the total number of homes sold is 22% lower than last year.
Investors are getting jittery and some predict that the orderly housing slowdown may turn into a full-blown crash. Investment in homes and condominiums fell at an annual rate of 6.3% in the second quarter, while some luxury home builders report a sharp drop in third-quarter profits.
Gabrielle Stein, chief international economist at Lombard Street Research, agrees. In a report published in August 2006, she said: "Falling house prices can no longer be ruled out. And if they do fall, then any thought of an orderly slowdown in the housing market must go out of the window. To be joined by hopes of consumer spending holding up in coming quarters".
What makes this more problematic is the impact it could have on the UK property market, as some market watchers on this side of the pond fear a US housing crash could set off a chain reaction.
Back in the US market, David Rosenberg, chief North American economist at Merrill Lynch, told Canada's Financial Post: "Every boom, mania and bubble follows the same path. What has undone every one of these back to the Dutch tulip boom in the 17th century is a massive accumulation of unsold inventory once you're past the peak of the cycle."
A fact that is not lost on the many American homeowners who are left with properties on their hands they cannot sell.
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