Is the housing slowdown in the UK a harbinger of what is about to happen in the US? Let's take a look at current situation in the UK and see if we can find any parallels for the US.

Citing official figures, the BBC is reporting nearly 26,000 property repossession orders were granted in the first three months of 2005, the highest number since 1995.

"We are seeing lots of younger people coming to us for help," Frances Walker, spokeswoman for debt charity the Consumer Credit Counseling Service (CCCS). "They are often very heavily in debt as they have been able to borrow far more than in the past. The trouble is they have no assets, so when they get into difficulty they have nothing to fall back on."

As a result, Ms Walker said that CCCS's counselors were advising more people to go bankrupt, many of them in their 20s and just out of university.

Between the fourth quarter of 2000 and 2004, U.K. home prices increased 88 percent, on average, according to the Halifax house price index. "Buy-to-let" became all the rage as investors shifted funds from their traditional portfolios into rental properties. Like all rages and with little warning, the housing market dramatically cooled.

According to the Council of Mortgage Lenders, lending to "buy-to-let" investors dropped 18 percent between the first and second half of 2004. During that time, the number of investors unable to meet their mortgage payments increased 50 percent. All of a sudden people that were thinking they would rent it out and make 15 or 20 percent appreciation, were left with huge mortgage payments, negative appreciation and rent that did not cover carrying costs.

Mortgage equity withdrawal slumped to 6.9 billion pounds in the fourth quarter of 2004, the lowest since the final three months of 2001, according to Bank of England statistics. Less mortgage equity withdrawal means less finance available to households so a slowing housing market is enough to cause a turnaround in consumer spending. Loan write-offs and revaluations by banks reached 6 billion pounds last year, the highest since records began in 1993, according to central bank statistics.

Just one year ago everyone believed the supply of houses for sale simply could not keep up with demand. It was a seller's market. The mortgage industry looked great and the number of people in arrears was very low and foreclosures were at an all-time low. One year later repossessions hit their highest total since 1995.

The Bank of England trimmed its 2005 growth forecast to about 2.6 percent from 2.7 percent amid evidence that consumer spending, which has fuelled 51 successive quarters of growth, is decelerating. The British Retail Consortium on May 10 said store sales slumped the most in at least 10 years in April.

I am wondering what will happen to consumer spending when taxes pick up and housing prices further decline? It seems to me that Chancellor Brown is in denial over the state of affairs. Brown claims that the UK is on target with his self imposed "golden Rule" of borrowing only to invest. Others disagree.

"With the economy unlikely to meet Mr. Brown's forecast of three per cent growth this year we still expect taxes to have to rise after the election to put the public finances on a more sustainable footing," said Capital Economics' chief UK economist, Jonathan Loynes.

And, the Shadow Chief Secretary to the Treasury, George Osborne, said all the figures proved was that the Chancellor had got his figures wrong again. Mr. Osborne said: "These figures show the current budget deficit is half a billion pounds worse than the Chancellor said it would be in the Budget just one month ago.

"This is further backing from the Government itself for what almost all the independent experts have been saying - that there is a shortfall in spending plans that they would have to fill with higher taxes."

Higher taxes would just about kill the housing market and consumer spending as well. Already UK housing appears to be on the brink as evidenced by the April report from the Royal Institution of Chartered Surveyors (RICS) which found that 40% more surveyors experienced a fall than a rise in house prices. This is up from the 39% the previous month and not far from the 12 year high of 44% recorded last November. UK house prices have now dropped for eighth consecutive months.

In an effort to keep the UK housing bubble alive, Brown doubled the stamp duty threshold to £120,000. Is this an act of futile desperation? At some point does it really make sense to keep encouraging people to spend money they do not have on over-priced assets they can not afford?

The moves in the UK to keep the housing bubble alive seem similar to what is currently happening on this side of the ocean as reported in Should the government sell bread, orange juice, or mortgages? with President Bush urging tax credits for homebuilders and Housing and Urban Development Secretary Alphonso Jackson "absolutely emphatic" about the US government "winning back our share of the market that has slipped away to subprime lenders".

Should this really be government's role, here or there or anywhere to promote a specific kind of consumption? Will it serve to lower prices to first time buyers or will it keep them elevated up until there is a housing crash?

Bloomberg is now reporting U.K. jobless claims rose for a third month in April and wage growth eased to the slowest in almost a year amid signs expansion in Europe's second-largest economy is faltering.

The number of people claiming unemployment benefit rose by 8,100 to 839,400, the Office for National Statistics said in London today. The central bank last week trimmed its economic forecast and said a slowdown in consumer spending has "become more marked" leading to speculation of a rate cut.

In the meantime Brown's "Golden Rule" will be fighting an uphill battle with UK manufacturing conditions getting worse according to the Confederation of British Industry (CBI). A survey of small and medium-sized firms from the CBI found that trading conditions over the past quarter remain tough, with output, orders and employment all falling. The survey found that small firms reported the sharpest falls in numbers employed since October 2003 and although medium-sized firms reported broadly unchanged numbers, they expect to reduce employment over the next three months.

Meanwhile, back in the states we have a mixed bag. Home sales and housing starts are still quite strong (but in a disorderly up down up down fashion. That is a sign of a topping market. On the other hand higher, interest rates and a weak economy seem to be taking their toll as foreclosures jumped 57% from last year in some areas. The hardest hit states were Ohio, Texas, Michigan and Georgia, with more than 2,300 new foreclosures each.

Manufacturing is clearly in trouble in the UK. Enquiring minds might be wondering about the US. Let's take a look. Manufacturing activity in the New York area deteriorated sharply for the second straight month in May, the New York Federal Reserve Bank said Monday. The bank's Empire State Manufacturing index fell to -11.1 in May from a revised 2.0 in April. This was the first negative, and lowest, reading since April 2003. Readings below zero indicate contraction. The drop was unexpected. Economists were forecasting the index to rebound to about 10.7 in May from the initial estimate in April of 3.1. Given that leading economic indicators have now gone negative for the first time since early 2003, there is no war stimulus to look forward to, business tax credits expired at the end of 2004, and we have had eight consecutive rate hikes, I am inclined to think this is a sign of things to come as opposed to an outlier.

The cycle here in the US will likely follow a similar path as to what is currently happening in the UK since the "buy to let" aka "buy to rent" is now the latest fad here in the US.

They are one more sign of the magnitude of the real-estate boom in the US. Eager to cash in on one of the strongest housing markets in the postwar era, speculators and even average investors are buying homes and renting them out until they decide to sell them at presumably far higher prices.

"Housing derives value from rents and the two cannot diverge for very long," says Mark Zandi, chief economist at Economy.com. "People may care about this if the weak rental market weighs on the single-family housing market."

'Get rich' seminars
Other investors are being lured by so-called real estate investment seminars, which frequently advertise on Sunday-morning television shows. These seminars purport to show people how to get rich - by buying and renting real estate. They usually include sections on purchasing repossessed or foreclosed property. There are often promises that developers will pay many of the closing costs and provide appliances.

Yet the riches can be elusive. One woman, for instance, bought a new house in Cordova, Tenn., a suburb of Memphis, with the intention of renting it. On a real estate Internet chat room, she bemoaned that her closing costs ended up running $4,000 more than her mortgage broker had quoted two months earlier. She paid fee after fee, including $1,000 to a property manager to rent the house.

"Never did find a renter because they had 83 other properties closing in the same time frame as mine and in the same area!" she wrote. After eight months, she reduced the rent by $350 a month and eventually sold the house after a year for $10,000 less than the original purchase price. She did not return e-mails asking for more information.

I think she got out lucky. $10,000 is a costly but not fatal mistake. Those pouring it on now with "buy to let/rent" ideas will not do nearly as well.
Here is the scenario I envision:

1) Stagnant housing prices that are hard to rent
2) Decreasing cash out refis
3) Decreasing demand for manufactured goods
4) Decreasing manufacturing employment
5) Decreasing demand for housing
6) Housing speculation stops
7) Housing prices fall
8) Decreasing retail employment
9) Decreasing demand for goods and services
10) Recession

My conclusion is that we are about 4-8 months behind the UK cycle with a recession headed our way in 2006.