Until the US housing market starts to right itself it's unlikely US consumers are going to gain too much confidence and without confidence the chance of economic recovery will remain a forlorn dream.
House prices are still down 32% from their 2006 peak and this is where the viscous cycle kicks in. Depressed house prices decimate loan-valuation ratios which triggers defaults but wannabe vendors can't sell in a falling market.
Low interest rates don't help much either. According to RP Data, most US home owners are on 30-year fixed rate mortgages and so don't feel the relief when rates fall, like they have been in the US for a long while now.
In contrast, in Australia most home buyers are on variable rate mortgages so as soon as rates relax they feel it in their wallets almost immediately, which reminds us why Australia is known around the planet as one of the most reactive economies to monetary policy changes.
Returning to problems state-side, distressed house sales make up an estimated 30% of all residential real estate sales. Combined with the 8% of US mortgages that are 90 days or more in arrears it's not a pretty picture. In Australia only 1% are in that category.
The result is sales volumes are 33% below their 5-year average. US real estate researcher CoreLogic reckons, according to a newsletter released by RP Data, that the number of distressed sales could even rise another 25% before the year is out.
RP Data's Tim Lawless said the depressed US housing market is pushing both their government and banking sector to look for increasingly creative ways to attack the problem.
Like banks partially cutting their losses by offering principal reductions and more flexible re-payment options, though this is more about banks protecting themselves than their customers. Many US mortgage being non-recourse lets borrowers walk away and all they have to do is hand back their house keys, leaving the banks with the underwater asset.
The worrying backdrop is that US unemployment since the early 1990s has normally been around 6%, meaning its current 9% level - albeit it's still better than the near 10% level it almost hit a year ago - is 50% higher than normal.
The nervousness this is fuelling among consumers helps explain why retail spending is growing only 0.2% year on year, the flattest growth rate in years. Trouble is, given the way consumer spending drives the US economy, the result is that until this starts to improve not much else will.
And some people think Australia is doing it tough. Yeah right.
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