Worriers are spoilt for choice at present. But there is probably nothing investors should worry about more than the future for US house prices. This applies even for those who live nowhere near the US.
The US housing market is wildly out of whack, with a huge overhang of 4.55m unsold houses. Data on Friday showed this backlog at a record level, which would take more than 11 months to clear if sold at a normal pace.
The median house price, according to government figures, is down 8 per cent from a year ago. The S&P Case-Shiller index, based on 20 large cities, suggests the problem is worse than this, with prices down 15 per cent in nominal terms since the peak in 2006.
There are various ways in which the market could return into balance. But what is most important is how prices adjust.
This may seem debatable. After all, lower prices should mean that more people can afford their own home. Another way to bring the market into balance, a slowdown in construction, would have nasty economic consequences of its own.
But prices are more important. This is firstly because of their impact on the economy. There is a debate over what economists call the “wealth effect” – the tendency of homeowners to spend more when they feel wealthier due to their extra wealth on paper. But when prices were going up, this effect looked substantial.
The dramatic rise in real house prices coincided with an epic collapse in US savings, as shown in the graphic. It reached the point where the savings rate became negative, so that Americans spent more than they earned.
It follows that the risk of a negative wealth effect is now quite severe. Consumer confidence surveys, showing sharp falls in recent months, confirm this.
The Financial Times
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