Building pessimism in the US

Confidence among US home builders has hit an all time low in October, breaking the previous record set in January 1991. All components of the survey were weak – present sales fell to an all time low (breaking the January 1991 record), future sales were unchanged (staying at an all time low), and prospective buyer traffic slipped below the previous record set in December 1990. The data suggests that the pain will continue until the huge overhang of properties begins to unwind. Bigger discounts and incentives have failed to revive demand, and further house price falls seem inevitable.

The report underlines Ben Bernanke’s comment earlier this week, when he said that the housing market’s contraction will be a “significant drag” on US growth into next year. The Fed “will continue to watch the situation closely and will act as needed to support efficient market functioning and to foster sustainable economic growth and price stability”.

As I argued on this blog in August (before the Fed cut rates by 0.5%), the Fed will have to act fast if it is to prevent a slide towards recession.