October 25, 2007 | posted by Michael Baxter in IABN |

So if the results from Merrill Lynch might have shareholders in banks making for the nearest tall building from which to jump, wait until you hear the latest news on the US housing market.

According to the National Association of Realtors, sales of existing homes in the US fell again in September. This time, annualised sales came in at 5.04 million units, from 5.48 million in August. In all, annual sales were down 8 per cent, and are now sitting at the lowest level in 9 years.

There are now enough houses for sale in the US to meet demand for 10.5 months, and the supply of single family homes jumped to a 22-year high of 10.2, from 9.3.

Capital Economics put it this way. The data suggests, “There is massive downward pressure on median home prices, which already fell by 4.2 per cent over the year to September.” Its US economist Paul Ashworth, said, “The recent credit crunch has clearly had a devastating impact on an already-weak housing market. This is worse than even housing bears like ourselves thought it would get, surely much worse than the more lackadaisical Fed thought it would get. The bottom line is that we are now certain to see a sizeable decline in house prices, which will have a big restraining effect on consumption growth.”

Those are bearish words indeed, but alas, if anything, we fear that Mr Ashworth’s warning might be understating the danger.

Right now, median house prices are down 4.5 per cent. It’s not unreasonable to assume this fall is set to grow, quite significantly. This will in turn leave millions of Americans with negative equity.

For years, analysts who predicted the end of the US consumer boom were left with egg on their faces. But don’t fall into the trap of thinking that just because these predictions have been proven wrong up to now, the US consumption boom can last forever. It will end eventually. And when it does end, the US economy will hit recession - with a nasty jolt.

How the global economy, for so longer propped up by the borrowings of the US citizen, will cope with a major slowdown in the US, remains to be seen.

And right now, the US consumer is facing the biggest test yet.

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