US housing recession deepens

The US housing industry finds itself deeper in the quagmire as demand for houses fell to a record low and the value of homes slid further down last month. The August credit-market crumple made it more difficult for buyers to obtain loans.

The National Association of Realtors revealed Wednesday that sales of previously owned homes showed the biggest fall with a drop of 8 per cent in September to drop to an annual level of 5.04m.

Economists had forecast resales to fall 4.5 percent to an annual rate of 5.25 million from a previously reported 5.5 million pace in August. The decline was almost twice as steep as economists forecast.

The low demand for houses has taken place amid tightening lending conditions. Stringent lending standards and higher borrowing costs have reduced access to home loans and have resulted in increase in the number of unsold properties, thus pulling prices down.

The steep drop in demand implies that the housing market is galloping towards its worst phase. It underlines the risk to economic growth from falling home prices and declining activity in the sector. The demand has declined in spite of the central bank cut rates last month in an attempt to prevent the economy falling into recession.

Fearing the worst, Jonathan Basile, an economist at Credit Suisse Group in New York said, "The worst isn't behind us, the worst is here right now. Housing is going to be a significant drag on the third quarter and fourth quarter."

So where does the Fed go from here? Unrelenting weakness in the housing sector would prompt the Fed to cut rates further when policymakers meet next week.

Drew Matus, a senior economist at Lehman observed, "With the Fed faced with still-unsteady financial conditions, significantly weaker housing data than had been expected and the prospect of disappointing the market if they chose not to go, we think the risk-management view of handling the economy makes a 25 basis-point rate cut likely."

There is some apprehension that the true state of housing trends will not be known until early next year. An oversupply of new and existing homes might even lead to double-digit falls in house prices.