US continues downwards

A steep entrenchment in American house prices, despite sharp interest rate cuts, is still expected according to financial analysts.

Deutsche Bank is predicting a drawn out period of economic torpor and the speed at which the housing market falls is the key, it says in a new research paper.

'The fate of the US and global economies in the near to medium term is tied to the path of US home prices,' it says. 'Whether the cyclical downturn is limited to a mild and relatively brief recession or something deeper and more prolonged will depend on how far and how fast home prices fall, as well as how households and firms respond to that decline.'

Goldman Sachs forecasts more American house price falls over roughly the next 18 months, and expects a cumulative decline of 30-35%. It argues that American demand is set to be sluggish well into next year, and that banks are likely to reveal more losses.

'The general lesson of historical experience is that housing busts are prolonged episodes with significant and long-lasting macroeconomic consequences,' it says.

'The typical housing bust involves a sharp slowing in growth followed by sluggish recovery, significant declines in equity prices and credit growth, and falling nominal interest rates, though both the economy and equity markets usually bottom well before the housing market.'

Analysts at Barclays Capital point out increasing negative equity among American borrowers is a worrying trend, since financially stretched homeowners are "far less likely" to default if they have equity left in their houses.

'The percentage of loans moving underwater is rising at an alarming pace, and far more quickly than suggested by national or regional home price data,' the firm says, adding that 50% of loans to lower-quality American borrowers could be underwater or close to that by the middle of 2008.

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