The US property market seems to have little joy to offer investors at present. Sales of existing US homes fell 8% to 5.04 million in September (last available figures), the biggest year-on-year decline for 16 years, according to the National Association of Realtors. The fall was worse than market predictions of a decline to 5.25 million sales.

The average sales price also fell in September, dropping 4.2% from a year earlier to $211,700 (£103,000).

The sub prime mortgage crisis is likely to cause two million homeowners to lose their homes, and cause serious repercussions for the US economy.

In the years since 2001, lax lending standards lead to homeowners being approved loans far greater than their level of income could support. Once the initial rates ended and higher rates were reset, many homeowners were no longer able to continue to make payments. This has lead to mounting defaults and foreclosures, which has caused an excess of supply in existing home as well as newly built properties. The increasing inventory of unsold properties will increase the downward pressure on prices.

While the sub prime mortgage sector caused the initial credit crisis, the longer term effects are likely to increase unemployment, especially in industries related to housing. Reduced spending as consumers continue to tighten heir belts is likely to further inhibit economic growth.
The Federal Reserve gave some welcome relief to the housing market by cutting interest rates by a further 25bps, to 4.5%.

In a statement, the Federal Reserve stated that they believe “the pace of economic growth will likely slow in the near term, partly reflecting the intensification of the housing correction”.

Inflation will remain a concern in the short term, and will effect any further movements in interest rates. However, if inflation is inhibited by the slower growth of the economy, it is likely that the next move will be a cut in interest rates, possibly in early 2008.

Many analysts forecast GDP growth of 1.6% in 2008