The downturn in the US property market remains unabated, and is showing increasing signs of spreading into the wider economy.

The fallout from the sub prime mortgage sector has two main implications for the economy as a whole; as credit conditions have tightened, there is a lack of easy credit available to refinance; additionally, home equity extraction has become markedly more difficult. Both these factors have had a negative impact on the ‘wealth effect’ of many homeowners, and are largely responsible for the current weakness in the consumer sector, which has been most apparent in consumer spending figures, 

According to the National Association of Realtors, total existing-home sales fell by 1.2 percent to a seasonally adjusted annual rate of 4.97 million units in October, and are now 20.7 percent below the 6.27 million-unit pace witnessed in September 2006.

The national median existing-home price for all housing types was $207,800 in October, down 5.1 percent from October 2006 when the median was $218,900, but there is a downward distortion from the current problems with sub prime loans that slowed sales in high-price markets, and that dragged down the national median.

Freddie Mac, the Federal Home Loan Mortgage Corporation, recorded a fall in the national average for a 30-year, conventional, fixed-rate mortgage, to 6.20 percent. For October this figure was 6.38 percent, unchanged from September.

President Bush has outlined plans to freeze mortgage rate for many homeowners that will be affected by interest rate resets. This will aim to offer a five year relief in interest increases for many sub prime mortgage holders, the main aim of which will be to prevent a further flurry of foreclosures over the next five years.

Inflation remains a concern for the economy, and as a result, the Federal Open Market Committee has shown some hesitance in cutting rates for December’s meeting, as a weaker US dollar combined with record high oil prices will greatly increase the risk of inflation.  Ben Bernanke, the Chairman of the Federal Reserve, said “Core inflation has improved modestly, although recent increases in energy prices will likely lead overall inflation to rise for a time.”

However, due to the increased likelihood of a pronounced economic downturn, a majority of analysts now expect the Federal Reserve to cut interest rates next month.

Interest rates were cut for a third time on 11th December, from 4.5% to 4.25%. That followed a .25bps cut in November, and a larger cut from 5.25% to 4.75% in October, which was the Fed's first reduction in rates for four years.

The Federal Reserve recently cut its forecast for 2008's economic growth to a range of 1.8% to 2.5%, its biggest confirmation yet that US economic growth is now slowing.