Is a full-blown housing crash on the cards in the US?

As property prices rose on the other side of the pond, Americans used their houses as cash machines. They've been borrowing against the rising equity in their homes to fuel the spending spree that lifted the US out of the recession which followed the dotcom crash and the terrorist attacks of 2001.

Properties have doubled in value in some areas, including Hawaii and Florida. But there's trouble in paradise, as readers of MoneyWeek's regular commentaries on the US property bubble will know. Seventeen successive interest-rate increases have slowed borrowing as mortgage rates climb. According to Freddie Mac, the national average 30-year mortgage rate was 6.63% this week against 5.81% at the end of 2004. Add the rising cost of energy, and you have a foul brew that reeks of debt.

US homeowners are stretched. It's taking 6.3 months to sell existing homes and 6.1 months for new ones, an eight-year high. The median price for a new single-family home rose 2.3% in June from a year ago, according to the US Commerce Department. That's the smallest rise since December 2003. Meanwhile, the number of homes sold is 22% lower than last year.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Unsurprisingly, investors are getting jittery. Investment in homes and condominiums fell at an annual rate of 6.3% in the second quarter, while

Toll Brothers, a luxury home builder, last week reported a sharp drop in third-quarter profits. This is raising fears "that the orderly' housing slowdown predicted by the US Federal Reserve will become a full-blown crash", says The Observer.

Gabrielle Stein, chief international economist at Lombard Street Research, agrees. In a report last week, she said: "Falling house prices can no longer be ruled out. And if they do fall, then any thought of an orderly slowdown in the housing market must go out of the window.

To be joined by hopes of consumer spending holding up in coming quarters". What makes this more problematic is the impact it could have on the UK property market, as a US housing crash could set off a "chain reaction", says Edmund Conway in The Sunday Telegraph.

But what trigger is needed to set off a full-blown crash in the States? David Rosenberg, chief North American economist at Merrill Lynch, thinks he's got the answer. "Every boom, mania and bubble follows the same path," he tells Canada's Financial Post. "What has undone every one of these back to the Dutch tulip boom in the 17th century is a massive accumulation of unsold inventory once you're past the peak of the cycle." Unfortunately for America's homeowners, "that's exactly where you are with the US real-estate industry".