“I have never seen it as bad as this in 16 years. It can’t have bottomed out, there are still all those bad loans out there.”

Margaret Massitti is not a Wall Street banker. She is not describing the near10 per cent swing on Wall Street’s equity market over the past month, nor is she referring to the tightening credit conditions across American capital markets. Ms Massitti is a real estate broker in Cleveland, Ohio, and she is describing the residential property market there.

“Lenders will not finance any more. They have cracked down so rapidly that a normal person with very little money is having a really tough time.”

She explained that after the 17 successive interest-rate rises over the past two years and huge growth in the number of sub-prime mortgages, whose rates quickly rose above initial teaser rates, there are now a number of properties empty in Cleveland.

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BACKGROUND

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“People just walked away from their homes. Now it’s worse. One buyer had agreed a mortgage on a two-bedroom home, he had agreed to put down 5 per cent [deposit]. Last week, the lender now says he no longer qualifies.”

Ms Massitti’s prediction of a deteriorating housing market in the United States is not just an anecdotal hunch. Last week, the National Association of Realtors (NAR) published US house price statistics and home sales activity for the second quarter of the year. In Ohio, the number of existing homes sold fell by 7.3 per cent over the three-month period.

Over the Midwest region as a whole, activity was down 8.4 per cent compared with the same period the year before, with the average house price in the region down 2.2 per cent to $163,500 (£82,500). Sales of existing homes fell in 41 states during the April-to-June quarter, while average house prices were down in one third of the metropolitan areas surveyed.

Ohio is by no means the worst. In Arizona, the number of existing homes sold during the period fell 23.4 per cent. Florida was down 41.3 per cent. Maryland suffered a 21.1 per cent fall. Nevada slumped 37.5 per cent. California tumbled 19.8 per cent.

While economists and property experts broadly agree on the causes of America’s 18-month housing recession, a big row emerges on how long it will last, not least because the grim statistics from the NAR plot housing trends only until the end of June, well before the global sell-off in equity markets across the globe.

During the past few months, some of Wall Street’s biggest financial institutions have been trying to work out how much they are exposed to sub-prime mortgages. Under the terms of some of the loans, consumers could borrow as much as 110 per cent of their income, a salary that sometimes was never verified. House prices fell, interest rates rose and some sub-prime borrowers discovered that they had been lured by an initial teaser rate of interest that rocketed during the life of the loan. Not surprisingly, mortgage defaults surged.

The impact of the defaulting loans was felt not just by the mortgage banks who had lent the money. Those mortgages had been sliced, repack-aged and sold on to the likes of hedge funds and pension funds.

Over the past few months, Wall Street’s biggest financial institutions have been trying to examine the stress on their loan books. Already it has cost the clients of investment banks, such as Bear Stearns and Goldman Sachs, billions of dollars each. The rest are still to admit their exposure, with an estimated $100 billion of so-called “dead mortgages” in the market.

Wall Street banks became nervous of lending to each other, fearing that one of their counterparts may be sitting on a big loss and may not be able to pay back the funds.

Mortgage lenders have also tightened up their lending criteria and more than 50 of the sub-prime lenders have gone bust, leaving very few sources of funding for the poor. Now economists are debating the impact of this credit squeeze on America’s housing market in the future.

The outlook, according to Robert Shiller, Professor of Economics at Yale University, is bleak: “Real estate markets trend for years. It is more likely to keep going down. People keep repeating that the bottom is not far off, but I am assuming that this cycle is going to continue down for years and years.”

Not all economists are so gloomy. Lawrence Yun, the NAR senior economist, reckons that while “recent mortgage disruptions will hold sales back temporarily, the fundamental momentum clearly suggests stabilising price trends in many local markets”.

Part of the disparity between their forecasts may lie in the fact that each of the 50 states in America behaves like a local market. For example, the Northeast of the country was the first to slide into a housing recession 18 months ago, having been one of the first regions to benefit from the housing market boom, fuelled by cheap credit. There is evidence that parts of that region are among the first to recover.

Mr Yun suggests that part of the reason that Florida, Nevada and Arizona have suffered very badly in the last quarter may be because they had a “higher usage of sub-prime mortgages”.

“During the boom, prices in Florida rose so fast that many people saw the only way to buy into that market was to take a sub-prime loan that had a very low introductory rate, in the hope that when the rate increased, the market would have done so as well,” Mr Yun said.

Douglas Addeo, a real estate broker based in Florida, said: “The mortgage situation is complicating things, banks are imposing much harsher conditions and prices have declined substantially.”

Both Mr Shiller and Mr Yun point out that it is difficult to call the bottom of the housing recession because the current US property slowdown is very different from the past two. The slides in the early 1980s and 1990s were triggered by a sharp fall in employment and sustained by high interest rates. In 1982, rates were at 16 per cent.

Mr Yun said: “This recession is unique compared with the past. Before, people lost their jobs and had to sell their homes. This time round the US has had four million job gains. Many homeowners will still have accumulated significant wealth. If people are not desperate to sell and can stubbornly refuse lower prices, we may be nearing the end of the housing cycle.”

To complicate matters still further, some real estate brokers claim that official house sales statistics are misleading and inaccurate. Bob Schwartz, broker based in San Diego, said: “The market is a lot worse than the published figures.

“The big thing is what the numbers don’t tell you. For sure, a property might sell for $600,000, but what you don’t see in that price are the buyer’s concessions. Buyers will now typically say: ‘We want $15,000-worth of closing expenses paid by the seller.’

“That’s legal fees, loan fees, escrow fees. This has been standard since 2005. So the price the seller actually gets is far lower.”

So how easy will it be to pull out of the housing recession?

Mr Yun says that with the surging cost of rents, now at nearly a 20-year high, potential property owners will be enticed back into the market.

Mark Grinis, a consultant in distressed real estate at Ernst & Young, pointed out that the market has contracted so rapidly with slowing financing and construction that the ability of the market to pick up may be diminished: “It takes time to build homes.

At the moment, there is no movement at all at the bottom end of the market. We are in the very early stages of this slowdown. At best, we are only at half-time.”

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