The U.S. Housing Market Blues

The chickens have finally come home to roost on the U.S. housing market. As U.S. housing prices have now started to decline at an accelerating rate, there can be no doubt that the U.S. is presently in the throes of its worst housing bust in the past sixty years. And as estimates of subprime mortgage related losses in the financial system mount, there is every indication that the housing market woes will spread to the rest of the U.S. economy.

In attempting to gauge how serious the ongoing U.S. housing bust might be it is well to reflect on from where we are coming. For between 2000 and 2006, the U.S. experienced an unprecedented housing price bubble, with real home prices increasing by a staggering 80 percent. As a result, the ratio of home prices to incomes surged from an historic average of 3.2 to its present level of 4.5, which would support the view that home prices could fall by anywhere between 20 and 30 percent in the course of the current downturn.

U.S. home prices are already declining at the national level to a degree that has not been experienced since the Great Depression. Yet the inventory of unsold homes has risen to record levels, while a whole host of factors are conspiring to severely constrain housing demand in the year ahead. Mortgage lending standards are being substantially tightened, Adjustable Rate Mortgages are due to reset in increased amounts, and speculative positions are being unwound. Little wonder then that the futures market in the Shiller-Case housing market index is suggesting that home prices in most major U.S. cities will fall by between 5 percent and 10 percent a year over the next two years.

Read Complete Story