HOUSE prices are set to drop in the US for the first time on record, US investment bank Goldman Sachs warned this weekend.
Prices in several segments of the market have already started to fall, and the overall market will move into the red even in nominal terms next year, fuelling fears that this will trigger a downturn in consumer spending and hit an already slowing US economy.
Jan Hatzius, economist at Goldman Sachs, said: “The risk is rising that nominal US home prices may be headed for an outright decline in 2007. It would be the first decline in national home prices ever recorded, at least in nominal terms.”
In real terms, prices have declined during several periods, including a 9% drop from 1979 to 1984.
In a special analysis of the data, the Goldman economists found that seasonally adjusted US house prices were already falling in dollar terms. The nominal median price of a single-family home has been declining slightly at a 1% annualised rate since the fourth quarter of 2005, the research shows.
The median price of a condo or co-op apartment has been falling more steeply at a 9% annual rate. Hatzius said: “It is not surprising to see relatively greater weakness in the condo and co-op market, which is much more concentrated in overheated coastal parts of the United States”.
Asking prices, according to the real estate brokers’ multiple listing services, are also weak. Goldman’s proprietary database covering 52 regional markets shows that, on a population-weighted basis, the median asking price is up only about 2% since last summer.
Given the reported sharp decline in bidding wars over the last year and the increasing willingness of sellers to accept lower offers, this is probably also consistent with a drop in home price inflation into negative territory, the report says.
The Office of Federal Housing Enterprise Oversight’s index is also likely to show a sharp slowdown for the rest of this year. As of the first quarter of 2006, this index was up 10.1% year-on-year, extremely close to the 10.4% year-on-year increase seen in the National Association of Realtors median-price data.
Goldman is forecasting that the year-on-year Office of Federal Housing Enterprise Oversight’s index growth could fall to 4% by the second or third quarter of 2006, and possibly into negative territory in 2007.
The bad news on house prices comes after the US economy slowed to an annualised 2.5% in the second quarter, down from 5.6% in the first quarter. This fuelled hopes in the markets that there could be an end the Federal Reserve’s rate hike campaign, which would boost share prices, even though the core inflation measure favoured by the Fed increased at an excessively strong annualised rate of 2.9%.
The Dow gained 119.27 points on Friday, or 1.07%, closing at 11,219.70. It posted its best weekly point gain since May 2005 as investors regained hope that the crisis in the Middle East would remain contained.
Source: thebusinessonline.com