United States house prices have suffered their worst plunge for two decades as defaults on sub-prime mortgages have shattered homebuyers’ confidence and lenders have withdrawn cheap loan deals.
According to the key Standard & Poor’s housing index, released on Tuesday, third-quarter US prices were down 4,5% on 2006 and were 1,7% lower than the second quarter of this year — the sharpest drop in the study’s 21-year history.
The figures, released on the same day as research revealing a collapse in consumer confidence, showed that a once patchy economic downturn has become a nationwide phenomenon. The investment bank Goldman Sachs warned on Tuesday that the chances of a recession had risen to between 40% and 45%.
S&P found a drop in house prices in all 20 of the cities in its study between August and September, with Miami, Detroit and San Diego faring worst.
David Blitzer, chairperson of the S&P’s index committee, described the outlook as “pretty much resoundingly negative”.
“If you look at a chart of housing statistics and recessions, they coincide,” he said. “Based on housing, the odds of a recession are more than 50%.”
Hundreds of thousands of Americans have found themselves unable to keep up repayments on sub-prime mortgages sold at the peak of the housing boom. Many had two-year “teaser” repayment rates that are expiring just as the property decline bites.
The squeeze is increasingly damaging the mood on US high streets. The New York-based Conference Board’s measure of consumer confidence this month fell to its lowest level since the aftermath of Hurricane Katrina in 2005. The board said its confidence scale has dropped from 95,2 to 87,3 since October.
Lynne Franco, director of the board’s consumer research centre, said: “Consumers’ apprehension about the short-term outlook is being fuelled by volatility in the financial markets, rising prices at the pump and the likelihood of larger home-heating bills this winter.”
In spite of the gloom, Wall Street enjoyed a bounce on Tuesday, sparked, in part, by the Abu Dhabi government’s decision to pump $7,5-billion into the struggling investment bank Citigroup. By midday in New York the Dow Jones average was up 173 points to 12Â 917.
The US’s traditional manufacturing heartland is feeling the economic pinch particularly badly, hit by home repossessions and the long-term decline of the automotive industry. In Cleveland, Ohio, this week, more than 6Â 000 people applied for 300 jobs at a new branch of the retailer Wal-Mart.
Amy Hanauer, director of Policy Matters Ohio, told Cleveland’s Plain Dealer newspaper that the queue was “deeply troubling”, adding: “That’s Depression-era kind of imagery.” The downturn could result in 524Â 000 fewer jobs being created next year, according to the US Conference of Mayors. It put the cost of the housing downturn at $10-billion in New York, $8,3-billionin Los Angeles and $4-billion in Dallas and Washington.
“The … crisis has the potential to break the back of our economy, as well as the backs of millions of American families, if we don’t do something soon,” said Douglas Palmer, mayor of Trenton, New Jersey.
Goldman Sachs cut its growth forecast and said it expected the Federal Reserve to cut interest rates to 3% in the next six to nine months, down from an earlier estimate of 4%. It forecast unemployment to rise from 4,7% to 5,5% by the end of 2008.
Ken Goldstein, an economist at the Conference Board, said all eyes were on the job market, which could be the next sector to suffer a knock-on impact from the downturn.
“If the labour market starts to weaken, as consumers now believe it might, then the post-holiday season is going to be really bleak,” he said. — Â