Is the US property bubble about to burst?

The global economy depends on US consumer spending - which in turn depends on the US housing market continuing to boom. So recent news suggests we should all be very worried indeed, say John Robson and Andrew Selsby of RH Asset Management...

Recently, respected economic commentator Roger Bootle made the point that the whole world economy is dependent upon the US housing market continuing to boom. The US housing market is of such importance that we are specifically studying developing news in that area. In recent weeks the following has been reported:

David Seiders, Chief Economist for the National Association of Home Builders, expects 2006 housing starts to fall 6-8% with, he says, a remote possibility of a sizeable house price decline. New housing starts in December fell 8.9%.

In December 2005 it was reported that 81,219 properties were in the process of repossession, up 13.5% compared to November. Currently, the foreclosure rate is 13% higher than at the same time last year.

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December house sales were down 5.7%, the slowest pace in nearly 2 years. According to the National Association of Realtors, the stock of unsold houses continues to rise.

Somewhat surprisingly, bearing in mind the above, the University of Michigan's Consumer Sentiment Index for January was 93.4, compared to December at 91.5. This is in spite of the fact that apparently 1 in 53 households filed for bankruptcy in 2005. Bankruptcy in the US - and we would argue in the UK as well - does not carry the social stigma it once did.

The fact that debt servicing in the US as a percentage of disposable income is at record highs, may account for the skewed results of a recent survey by the LA Times. This survey found that half of the American public think the US economy is in bad shape, whilst 30% of them think the country is actually in a recession.

The year 2006 is likely to be a telling year, particularly if The Economist is right in its recent leader headlined Danger time for America'. Referring to Greenspan's departure they said: "Mr Greenspan's departure could well mark a high point for America's economy, with a period of sluggish growth ahead. This is not so much because he is leaving, but because of what he is leaving behind: the biggest economic imbalances in America's history".

By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.

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