Sub prime crisis continues to wreak havoc on US economy

28 November 2007
US house prices have dropped 1.7 per cent since the second quarter of 2007 and are down 4.7 per cent on 2006 in what marks the worst plunge in two decades.

According to Standard and Poor's housing index, which was released yesterday, US house prices have suffered their worst plunge since they began their study 21 years ago.

The crisis began earlier this year, when the two year 'teaser payments' on many of the controversial sub prime mortgages that were sold at the peak of the US housing boom came to an end, and hundreds of thousands of borrowers defaulted, unable to keep up with their repayments.

As a result many sub prime lenders were forced to make job cuts and pull cheap loan deals; and financial groups all over the world that had investments tied up in sub prime, including Wall Street bank, Citigroup Morgan Stanley, Goldman Sachs and UK banks Northern Rock and Alliance and Leicester have been hit hard, suffering billions of pounds in losses.

And now it seems potential US home buyers' confidence has been crushed; S&P found a drop in house prices between August and September in each of the 20 cities it studied: Miami, Detroit and San Diego were hit the worst. The credit agency is now predicting that, based job housing, odds of a recession are 'over 50%'.

“The declines in the national figure are notable for two reasons,” says Robert J. Shiller, Chief Economist at MacroMarkets LLC.

“First, the 3rd quarter decline, at 1.7%, was the largest quarterly decline in the index’s 21-year history," he continues, "And, second, the year-over-year decline posted its second consecutive record low at -4.5%.

"Consistent with prior 2007 reports, there is no real positive news in today’s data," he said.

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