Consumer gloom as US house prices fall again
The US housing market accelerated into a double-dip recession, complicating the Federal Reserve's efforts to revive the world's largest economy.
As the Fed's monetary policy committee met for the first time this year, the latest house-price figures gave a dire warning that the economic recovery to date rests on some shaky foundations.
The Case-Shiller index, widely regarded as the best overall measure of the regionally diverse US housing market, showed average prices were down by 1.6 per cent in November, compared with the same month in 2009. The index examines 20 major metropolitan areas, of which 16 are now lower, year on year. Eight of the 20 regions are already falling to new lows, from their pre-recession peaks in 2006 and 2007.
During the credit bubble, reckless investment from across the financial world ended up in the US housing market, by way of cheap mortgage loans to sub-prime borrowers. When the puffed-up prices eventually reversed, the result was a crisis that almost brought down the financial system in 2008.
Now, house sales remain subdued, foreclosures are at record levels and economists remain uncertain where the natural level for US house prices ought to be. The effects of further declines on the global banking system ought to be slight, because banks have returned to profit, built larger capital cushions and shunned risky mortgage derivatives, but the effects on ordinary Americans – and on their spending habits – could remain profound.
"The falls in house prices seen towards the end of last year are likely to continue throughout this year," predicted Paul Dales, the senior US economist at Capital Economics. "That will send more homeowners into negative equity and constrain consumption growth."
The Federal Reserve's Federal Open Market Committee has held official US interest rates as close to zero as possible since late 2008, and embarked on two rounds of "quantitative easing" – printing money to push market interest rates lower. Markets do not expect any policy change today, and anticipate the committee will reiterate its concern about near-10 per cent unemployment.
US GDP data on Friday are expected to show a strong pick-up in the final quarter of 2010, though, and consumer confidence this month is the highest in eight months, according to new figures yesterday.