AS US Stock Markets Crashed by More Than 40%, American Investors Turned from Their Stockbrokers to Real Estate Agents to Rebuild Lost Wealth and Provide an Alternative to Dismal Savings Rates

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AS US stock markets crashed by more than 40%, American investors turned from their stockbrokers to real estate agents to rebuild lost wealth and provide an alternative to dismal savings rates. So last week's economic report showing October's new housing construction had tumbled to the lowest level in nine years sent a cold chill through a hot market and confirmed anecdotal evidence.

In Washington DC home sellers are taking a lot longer to offload their $1m-plus trophy properties while residential building in New York has begun to fall, despite the lowest interest rates in decades. This could have serious consequences for the economy.

From the cliff-top beach houses on the west coast to the penthouses on Manhattan's towering high rises, the property market has been one of the US economy's few firing pistons. National gains for housing during the past three year years have been about 16%, with pockets of California and the north-east boasting increases of about 20% and 30%. But median house prices are a crude indication of what is happening in a property market as huge as the US. Cities such as Los Angeles, New York or Boston comprise several distinct property markets, including first homes in the outer suburbs, investor-dominated inner-city apartments and multi-million trophy houses. That makes it dangerous to generalise.

But double-digit gains are pretty heady when you consider that home prices historically rise at the rate of inflation, plus a percentage point or two. The property boom has provided a much-needed boost to consumer confidence and helped to keep spin-off sectors, such as building and furnishing, motoring along at a time when corporate spending has stalled.

For every $1 in stock market gains, 3 cents typically is spent; for every $1 in housing value gains, 10 cents is spent, the Mortgage Bankers Association of America says.

Falling interest rates have also sparked a boom in remortgaging and provided a major source of funding for consumer spending. With mortgage rates the lowest since Dwight Eisenhower was in the White House, sales of new and existing homes have been running at record rates this year. New-home sales in June topped 1m for the first time. But as housing prices have spiralled higher, so have concerns that a so-called housing bubble, at least in a few areas of the country, was ready to pop.

That creates a conundrum for buyers: should they get in now before prices rise even higher or wait for the "inevitable" correction and then snap up the bargains?

Steep price increases in major population centres, such as California, and a dramatic spike in foreclosures suggests that buyers have been bidding up prices to a point where they are no longer affordable.

The National Association of Realtors (NAR) and National Association of Home Builders (NAHB) deny there is a bubble and applaud Federal Reserve chairman Alan Greenspan's dismissal of the "bubble question" as "most unlikely". According to the NAR, buyers are spending about 2.9 times their annual income on average to buy a home, which is inside the 25-year range of 2.5 to 3 times income.

America's changing demographics are also playing a part. Home ownership among Americans in their 30s and 40s is about 70% rising to about 80% as they start retiring in their late 50s and 60s. Added to this is the demand from their children as they leave home. Lenders are also targeting the rising number of immigrants as a growing first-time homebuyers' market.

Strict zoning and environmental controls have slowed construction of new housing in key growth states, such as Minneapolis, leading to a record low inventory of houses. And regions where experts might have expected prices to tumble, such as one-time boom suburbs surrounding Silicon Valley and other technology-driven areas, have so far defied the downturn. …