JOE SIXPACK and the man on the Clapham omnibus may disagree about the relative virtues of soccer and American football, about the desirability of jazzing up all sorts of food with curry, and whether it is a good idea to sprinkle vinegar on chips (yes, in Britain) or fries (no, in America). And they may not agree on what to call what they are buying — Brits buy “property” and Americans put their money and hopes in “real estate”. But they share one obsession: the price of houses.

For good reason. For non-millionaires, their homes are more than their castles. Homes are the largest asset in their portfolios. Also, many Britons have second homes in Florida — the land of sunshine and beaches for mom, golf courses for dad, Disney World for the kids, and 40% annual appreciation for the entire family.

The beaches, golf courses and theme parks are still there, but the annual appreciation isn’t. The sellers’ and renters’ market has turned into a buyers’ market: vacancies are up, the number of unsold houses and condos is rising, and prices are falling, especially for what Paul Purcell, of real estate (property) consultants Braddock + Purcell calls “vanilla properties” — commonplace homes with locations and architecture that are “not great”.

Fortunately for many American homeowners, south Florida is not typical of the United States. It is, instead, one of the areas in which buyers somehow decided that prices were on a one-way escalator to getting rich quick. In other areas the market remains strong. Houston, Atlanta and Dallas did not experience the wild upward price spiral, and are not experiencing the rising inventories that are causing builders and sellers such pain elsewhere.

Freddie Mac (the Federal Home Loan Mortgage Corporation) is a big player in the housing market, providing liquidity to mortgage markets by buying one mortgage every seven seconds. Its chief economist, Frank Nothaft, says the housing market is witnessing “a moderate and orderly slowing”. To put the current softening into perspective, he points out that new construction and sales of houses this year will be the third highest in the nation’s history, after the boom years of 2004 and 2005. Consultants at Realestateabc.com, a consumer information website, agree: “If it weren’t for the high expectations of the last sales cycle, this might actually be a ‘normal’ market.”

So don’t abandon hope all ye who have entered the housing market. Yes, some areas are loaded with unsold inventory and distressed sellers. But in places like Manhattan the best properties are still snapped up after a bidding war among buyers. In other cities sales are slower, but prices are still firm.

Add all these disparate regions together, and the picture is grimmer than sellers would like it to be, but it is just about what the Federal Reserve Board says it is pleased to see because it is eager to engineer an inflation-stifling slowdown. Housing starts in America in July declined 13% from the previous year. JP Morgan finds this “consistent with a continued worsening of homebuilder order trends through July, as well as continued increases in inventory levels in several key markets

... Total permits, a one-month leading indicator of starts, continued to decline at an even stronger rate”.

Whether this is a normal adjustment en route to a soft landing in the housing market, or the beginning of a crash, is in the eye of the beholder. Investors in homebuilder shares probably feel as if they have already been through a crash. A recent report by analysts at Citigroup Global Markets estimates that the current median share price of a group of 13 homebuilders has fallen by almost 50% from its 52-week high. And there is no question that the consequences of the decline in housing will extend beyond that industry and reach into the over- all economy.

There are two ways that the softening of the housing market will affect the economy. The first is obvious. The construction industry will need fewer workers, buy less timber, cement and other building materials, and generally reflect the increasing pessimism of the homebuilding industry’s chief executives, who are pulling in their horns. In the last quarter, real (inflation-adjusted) residential investment fell at an annual rate of 6.4%, following small declines in the two preceding quarters.

The second effect of the weaker housing market will be — well, may be — on consumer spending. For one thing, consumers who see the value of their houses decline will feel poorer, even if they have no intention of selling. And their ability to tap the steady increases in the value of their homes by “mortgaging out” to fund current consumption will be a thing of the past.

Most analysts are predicting that consumers, deprived of the feelgood factor and of an important source of buying power, will avoid petrol-consuming trips to the malls and save a larger portion of their incomes, which finally seem to be rising faster than inflation. But “business at auto dealers and other retailers picked up in July”, according to Goldman Sachs. Victoria’s Secret sold more sexy underwear in July, but Barnes & Noble sold fewer books, perhaps portending a change in the nature of Americans’ leisure activities.

It is, of course, too early for changes in house prices to affect consumers’ daily purchases. If forecasters are right that the flow-through effect will be felt later this year and in 2007, America’s economic growth rate will drop to somewhere between 2% and 2.5%, and the unemployment rate will rise to perhaps 5.5% by the end of next year. Inflation will be defeated, the Fed will lower interest rates, and growth will accelerate in 2008, just in time for the presidential elections.

That, at least, is what Republicans, almost certain to lose control of the House of Representatives later this year, are hoping.

Irwin Stelzer is a business adviser, consultant to Freddie Mac and director of economic policy studies at the Hudson Institute

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