Economists and s in the US are predicting that housing prices will start falling during the end of 2006 or early 2007. Facts are also supporting the predictions of these economists. According to the National Association of Realtors (NAR), median US home prices grew by 10% during the first quarter of 2006 and less than 4% during the second quarter of 2006 compared to the same period in the previous year respectively. Many economists are saying that rising interest rates are a major reason, but in reality, increasing house prices which are unaffordable and growing inventory of houses are main culprits for the fall in house prices.

The rising energy prices, which are reducing the disposable income of citizens, are also putting pressure on housing prices. While the interest rates come to a halt after mid-November 2006 elections in the US, it may beat the rising inflation rate. This increase in interest rates will further put the pressure on sale of existing and new houses. Also new applications for mortgage might fall steeply, which will further put pressure on prices. These fears of economists come true when the US Department of Commerce released the data in July 2006 that inventories of unsold houses have increased to an 11-year high and home sales declined by 13% since July 2005.

The decline in sale of new and existing houses and rising inventory of unsold houses may result in fall in the prices of houses from the very start of 2007 and which could accelerate further with time. The fall in house prices might increase the default rate on mortgages. The data released by the NAR in the second quarter of 2006 confirms that default on mortgage already started, and in California mortgage defaults rose 67% compared to the same period in 2005. Rising defaults would further put pressure on house equity/value. As these developments in the housing sector affect many industries, fall in housing prices and new construction will result in slowdown of the US economy. Between 2001 and 2005, even increase in real wages was unable to tame the inflation rate. It is expected that the rising inflation and slow growth in wage could dampen the consumption growth in the mid-2007. The expected recession may further slow down the growth in real wages.

Professional Banker Magazine, Global Recession, Economists, National Association of Realtors, NAR, California Mortgage Defaults, US Economy, Global Economy, Mortgage Markets.