A small 1950s bungalow in Stockton, California, is up for sale for $169,950. Sitting off a quiet road dotted with American flags, the Funston Avenue home has two bedrooms, one bathroom and a covered porch.

It was built as part of President Truman’s Fair Deal, a federal promise to guarantee economic opportunity and housing for America’s servicemen returning from the war.

Sixty years on, however, the American Dream has turned into a nightmare. The bungalow’s value has fallen by $110,000 in two years and the family who live in it have fallen so far behind with their rising mortgage repayments that they have been foreclosed by the bank.

This family’s story is a common one in the neighbourhood, which houses the bank workers and civil servants who zoom up Highway 205 to commute for two hours each day to and from the pricier city of San Francisco.

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Background

• Economist says US could plunge into recession

• Optimists stand tall as tremors hit

• City faces tough times as recession threat grows and era of easy money comes to an end

• Squeeze on Middle America worst since 1950s

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According to David Sousa, the real estate broker who is selling the house, the number of properties up for sale in the area has risen from around 1,800 two years ago to about 8,000 now. Most of those properties are in the process of being repossessed by mortgage lenders. Moreover, there is no sign that the residents of Stockton are past the worst. Their lot seems a far cry from the town’s sunny motto: “Stockton’s Great, Take a Look!”

Stockton is one of America’s foreclosure capitals – according to RealtyTrac, in November one in 99 households had entered the foreclosure process, six times the national average. “One of the biggest challenges we face is that the number of foreclosures have left the market saturated with unsold property,” Mr Sousa said. He estimated that prices were falling at “between half and 1 per cent a month” and said that that local mortgage lenders had been so overwhelmed by the number of repossessed homes on their books that they are trying to sell, that real estate brokers – estate agents to you and me – cannot get a decision from them for at least 30 days over whether they will accept an offer price.

So how bad can America’s housing market get? Robert Shiller, of Yale University, one of the world’s leading economists, thinks that the property market could continue to deteriorate “for years”, with the estimated $1 trillion-worth of losses in the market, ballooning to “three times” more. Professor Shiller, who famously predicted the top of the dot-com boom, told The Times at the weekend that the likelihood of Americans having to endure a Japan-style recession with property values declining for years is a “realistic scenario”.

“At the same time as this slowdown, the stock market is highly priced and we have high oil prices. There are a lot of negatives. We are facing a substantial possibility of a big recession,” he said.

This month, the S&P Case/Shiller house price index showed that property values had fallen in October at their fastest rate for six years, with all 20 of the cities monitored showing a decline. In some states, such as Florida, California and Arizona, property prices have fallen by 40 per cent in the past two years.

A world away from the Ivy League office of Professor Shiller, Max Spann, a property auctioneer in New Jersey, told the same story. The bulk of assets that went under Mr Spann’s hammer three years ago used to be agricultural land or government buildings in New York State, New Jersey and Pennsylvania. Now, most of his business is from builders trying to get rid of unsold new homes and banks desperate to remove repossessed homes from their books.

“The situation has really got worse,” Mr Spann said. “We are getting calls from the banks. The last thing lenders want to do is take back real estate. All the time that property is on its books, it is accumulating tax demands and is potentially a declining asset. They are using auctions to get out of that position.” Mr Spann’s business has doubled each year in revenues for the past three years, and he is expecting sales to triple in 2008.

“I think the real estate market will continue to slide at this rate in 2008 and 2009. And that’s all provided that there isn’t a recession. If that happens, all bets are off,” he said.

Yet the housing slowdown is not the only risk to America’s economy. One of the biggest threats is neatly expressed in marketing material welcoming visitors to Stockton, “California’s Sunrise Seaport – twinned with Foshan, Guangdong”. The closeness between the American town and one of China’s fastest-growing cities underlines America’s growing dependence on an economy that is expected to apply the brakes in 2008.

Carl Weinberg, chief economist at High Frequency Economics, believes that China poses one of the greatest threats to the health of the US economy and could force America to slow next year. “The American and Chinese economies are now inextricably linked,” he said. “The US imports a quarter of a trillion dollars-worth of goods a year from China. There is now a new leader on China’s state council and we are expecting them to impose harsh measures next year to slow their economy. They could well introduce fiscal measures with real teeth, like blocking exports of mobile phones, for example. A slowdown in China would have big repercussions for us. The risks could be awful.”

Mr Weinberg is still sanguine about America’s prospects next year and insists that its economy is far from facing a catastrophe. “The odds of a recession are still slim,” he said, explaining that while growth looks to have slowed sharply since the third quarter of 2007, from 4.9 per cent to about 1 per cent in the fourth quarter, the US Federal Reserve is likely to stave off a sharper slowdown by cutting rates by another 1 per cent to about 3.25 per cent next autumn. He forecasts that even though unemployment will rise next year, he is expecting the percentage of the workforce unable to find a job to rise from 5.1 per cent to about 5.3 per cent in 2008.

While the forecasts of some of Wall Street’s top number-crunchers suggest that America may avoid a nasty recession, it is unlikely to feel that way for many families across the United States. Americans, who for the past two years have spent more than they took home for the first time since 1933, are arguably at their most financially vulnerable for generations. The risk that Americans may be forced to tighten their belts, dampening consumer demand, is a real one, now that they are confronted with a decreasing value of their homes, rising fuel prices and uncomfortably high food costs.

The milk price has doubled this year, to keep pace with the soaring cost of maintaining a dairy herd. Corn prices used to feed dairy cattle have doubled because of the rising demand for corn to ferment to make ethanol, the biofuel.

Amy Green, the proprietor of the Ivanna Cone Ice-cream Emporium in Lincoln, Nebraska, has raised her ice cream prices by 37 per cent in the past 18 months. “Everything has gone up. All the raw materials that I need to run my business have risen – the butterfat, the milk, the sugar and the fuel. I had to pass on the rising costs,” she said.

Ms Green, who at the height of summer makes 600 gallons of ice cream a week, said that the fuel price was so prohibitive that her suppliers would not deliver her goods for an order of less than $500: “We’re a small firm. I have to be really creative at finding ways to get my orders up to $500. I’m only ordering small items like spoons and ice cream cones.”

One of her neighbours, Mike Biggs, a third-generation cattle farmer just west of Lincoln, told The Times that business had been very difficult this year. Mr Biggs, who feeds up his 10,000 cows from about 500lb to as much as 1,400lb, explained that the volatility in corn prices and the rising fuel price meant that it had become very challenging to manage the farm’s costs. “The increase in the corn price was not anticipated. The rises meant that a lot of us got caught in the middle,” he said.

Rising food and fuel costs, increasing health insurance and declining property values have made economists jumpy about whether America’s consumers will continue to drive the economy.

The plight of the swath of struggling Americans has not gone unnoticed.

According to research compiled over the past three years by Harvard University, Middle America is experiencing the most severe financial hardship for more than five decades, and Edward Wolff, Professor of Economics at New York University, predicts that the squeeze on the middle classes would get tighter as banks are expected to tighten their lending criteria in the wake of this summer’s credit crisis.

Professor Wolff said: “These families are just not going to be able to take out additional debt. Credit-card companies and auto-loan groups are just going to start saying no.” He said that Americans had not been profligate in their spending – “they’re not expanding consumption, they are just trying to tread water”. He said that median household income has nose-dived by 7 per cent between 2000 and 2004, increasing only 6 per cent between 1983 and 2004.

Americans are being delivered a grim New Year warning, Professor Shiller said: “People aren’t scared yet – but once all this unwinds, they will be.”

Perils for US

Key risks to America's economy in 2008

— Rising energy prices

— Middle East unrest

— Rising food prices

— Worsening financial markets

— Slowdown in China

Source: Carl Weinberg, High Frequency Economics

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