Steepest fall in US house prices in 16 years fuels fears of recession

Words almost failed observers on both sides of the Atlantic yesterday as they reacted to the worst American economic data to emerge for some considerable time.

Consumer confidence slumped to the lowest level in almost two years and home prices scored their worst performance in 16 years, threatening US household spending, spurring talk of recession and prompting calls for the Federal Reserve to keep cutting interest rates. The Conference Board's index of consumer confidence fell more than forecast in September, to 99.8 from 105.6.

Meanwhile, the American National Association of Realtors said August sales of previously owned houses dropped 4.3 per cent, with inventories at exceptionally high levels, indicating that house sellers are not yet willing to reduce prices by as much as the collapse in demand would warrant.

Even so, the average US existing home sales price also fell in August, to $224,500 from $228,700 in July. The fall of $4,200 is equivalent to a 1.8 per cent month-on-month decline. This is the steepest drop in house prices for 16 years. Prices have risen by a mere 0.2 per cent since August 2006.

Confidence about employment prospects is also at a low ebb. The share of consumers who said jobs are plentiful decreased to 25.7 per cent from 27.5 per cent in August. The proportion of people who said jobs are hard to get increased to 22.1 per cent from 19.7 per cent.

Economists were uniformly gloomy about the numbers. "Hope of stabilization in US existing home sales has been blown to bits by terrible August data," Dimitry Fleming, of ING in London, remarked. "We doubt the recent Fed rate cut will manage to revitalize home demand any time soon. As long as prices remain in negative territory, buyers will continue playing the waiting game. At the current sales rate, it now takes a massive 10 months to clear the market.