US home prices see worst fall in 20 years

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American house prices dropped by record amounts in the third quarter of this year.

The average home price fell by 4.5 per cent in the third quarter of this year, compared with the same period in 2006, according to Standard & Poor's – the sharpest drop in property values since the firm inaugurated its national Case-Shiller index in 1987.

One of the index's creators predicted a significant chance of a recession as the US economy is pummelled by falling house prices, defaults and repossessions (especially affecting, but not confined to, the "sub-prime" borrowers), depressed financial markets, soaring oil prices and a decline in the dollar that threatens to turn into a rout.

"Over 50 per cent," said MacroMarkets LLC chief economist Robert Shiller, giving his odds for a recession. "We're in the aftermath of the biggest housing boom in history, so how do we use historical data to judge the outcome? We're out of the range of the normal variation in the data and I take that as very significant."

After 13 years of rising home values the US property market is crumbling, even though the Federal Reserve has recently cut interest rates twice – once by a half-point in September and by a quarter-point in October – to 4.5 per cent to encourage economic expansion and calm property and financial markets. The Fed said last week that it expects the housing slump and credit crisis to slow growth and push unemployment up next year.

It also came as no surprise yesterday that US consumer confidence fell for a fourth straight month in November to its lowest in two years, although the extent of the gloomy mood did startle analysts. Paul Ashworth, of Capital Economics, said: "All things considered, we still think the US economy will narrowly avoid slipping into recession, but it will be close. We do expect GDP to contract over the final three months of this year as surging energy prices squeeze real incomes and constrain spending."