'Serious correction' under way in US housing market

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All signs pointed downwards for the US housing market yesterday after new figures showing that prices for existing homes declined in August for the first time in 11 years, while sales dropped to the lowest level in two and a half years.

According to the National Association of Realtors, the median price fell 1.7 per cent last month to $225,000 (£118,000), while sales of existing homes dipped 0.5 per cent to an annual rate of 6.3 million. At the same time, ever more owners are being forced to put properties on the market as mortgage rates have steadily risen, further dimming prospects of an improvement in the short term. The total of existing homes on the market is now the highest since April 1993.

The latest data came as scant surprise, after multiplying recent signs of weakness in the housing market. Indeed, most analysts say the trend is natural after a decade-long run-up in prices, especially in urban areas along the east and west coasts. Richard Fisher, the president of the Federal Reserve Bank of Dallas, said yesterday that a "serious correction" in the housing market was now in progress.

The figures make it less likely that the Federal Reserve will resume increases in its key short-term rate, which the central bank has held steady at 5.25 per cent at its last two policy-setting meetings.

Not only are inflationary pressures subsiding. The Fed will also be loath to make it even harder for Americans to tap into the equity in their homes - a major factor in the buoyant consumer spending which has sustained the US economy over the past five years.

Reflecting the changing interest rate outlook, the 10-year Treasury note, an important yardstick for mortgages, rose 7/32 in early trading yesterday, pushing down the yield by 3 basis points to 4.56 per cent.

The weakening market has hit the stocks of building companies hard, as new housing starts have also dipped. About the lone bright sign has been a fractional easing of the most popular 30-year mortgage rate to 6.4 per cent in the most recent week. Even so, that compares with a 5.8 per cent rate in September 2005.