January 29, 2008 | posted by Michael Baxter in House prices |

And records came a-tumbling. The supply of new homes now available in the US is at a 26-year high, the annual drop in the median price of new homes for sale saw its biggest annual decline since 1970, and here is the big one, 2007 saw the biggest fall in new-home sales ever recorded in the US.

The catalogue of woe really is stunning.

The median price of new homes in the US fell by 10.4 per cent to $219,200, although the jury is out on how serious this is. Capital Economics pointed out that this particular price data is notoriously volatile, and cautioned against reading “too much into that figure.” Interestingly, the falls in prices were very much restricted to certain regions, with the south and west taking the lion’s share of the bad news. That’s the problem you have with gauging the US housing market, it covers such a large and diverse country that median price really only paints the broadest of pictures.

Even so, there is evidence that US house builders were offering various incentives to try and push sales along – for example covering the purchasers’ legal costs, or providing extra features, so if anything, it would appear the true cost of a new home fell by even more than the level the published data suggests.

Moving forward, we need to turn our attention to expected supply and demand. And this is where the real worry sits.

If sales have fallen to the lowest level ever recorded, then we must assume demand is very low. Well there is no Nobel prize available for pointing that one out. The US consumer appears to have done something many economists have in the past dismissed as one of those things that can never happen, for Uncle Sam and Auntie Samantha have taken to their sick room, with rugs pulled up to their chests, medicine flowing like free wine, while dialling 911 for the economic doctor to be quick.

But while demand falls, supply has rocketed. There are now 490,000 new homes for sale; to put that in context, the year to December saw 604,000 new homes being sold, so, right now, there are plenty of homes out there to meet demand.

Then to cap it all, First American Core Logic has released a report saying the risk of foreclosure is soaring.

So that’s a pretty unpleasant picture to behold.

What lessons can we learn? Well, for one thing, the US experience shows that a country does not have to be in recession, or suffering from rising unemployment, for the housing market to hit crisis. The current US housing woe does seem to be at a similar level of severity to the one experienced in the UK in the early 1990s. So-called experts have dismissed the idea of the UK seeing a repeat of the early ‘90s experience because they say while the job market is strong, house prices will never fall. In fact, the US experience shows us that this relationship can work the other way round, and a crisis in housing can cause economic recession.

It might just be worth bearing in mind, however, that, actually, even before prices started to fall, your average US home was very cheap. Now the median price in the US is $219,999, the equivalent of just over £110,000.

Is that a good thing or a bad thing? We are repeatedly told that soaring house prices in the UK are a good thing, but surely, when the average price is so high that it is beyond the reach of the average buyer, and makes the cost of repaying a mortgage, or rent, take up a massive chunk of disposable income, it is a bad thing.

Finally, the news on US housing provides yet more evidence, to join an already-massive mountain of historical experience, that markets that display all the symptoms of a bubble, are in fact bubbles, which always burst.