Housing Meltdown Hits US Economy

The sudden tightening of credit on high-risk sub-prime mortgages has led to a property price crash in the US, with devastating effects on the whole economy.

The unprecedented decline in US house prices may also lead to further pain for financial institutions, who collectively own more than $1 trillion worth of sub-prime debt.

Housing markets are local, and few areas have experienced the 30% decline in average house prices that has hit Cleveland, the sub-prime capital of the US

But average house prices across the US are declining for the first time since the Great Depression in the 1930s, and the magnitude of the collapse has surprised experts.

There is nearly a year’s supply of unsold houses standing vacant.

And the housing crash is now extending to the formerly “hot” housing markets in Southern California, Arizona, Nevada and Florida, where expanding populations and a strong economy were expected to keep prices high.

Mark Zandi, an economist at Moody’s, who is tracking the housing market, expects the fall in house prices to accelerate from 5% this year to 10% in 2008.

He says that prices could end up 10-15% lower than the peak of 2006 – if policymakers move quickly to stem the wave of foreclosures.

But if they don’t, and if interest rates are forced up by the inflationary worries, he says prices could fall by 15% to 20%.

Mr Zandi says there are three factors that have caused the property crash:

• speculative purchase of homes in hot areas by investors who intended to “flip” them, reselling quickly at a profit; 
• the availability of easy credit, where mortgages were granted to people who could not really afford them; 
• and the over-supply of new houses by builders.