Patrick Collinson

Do you want to know when the recession will finish, when interest rates will start rising again, and when the stockmarket will recover? It boils down to one thing: US house prices. I was in Chicago this week, speaking to fund managers, analysts, professors, politicians and even farmers. Chicago is a fabulous city. Go to the top of the Hancock Tower, order a Martini and enjoy mesmerising views of the greatest urban landscape in America. But as you down that 20-buck cocktail, thank your lucky stars you’re not one of the one million people in the United States losing their jobs every month.

Economic output slumped at an annualised rate of 6.2% in the last quarter of 2008. Consumer confidence is as frozen as the Michigan lakeshore. The optimists are clinging to the belief that the United States will be the first out of this recession. It led the world into this mess, and it will lead us out. It’s a tempting proposition. But what will be the catalyst that sparks a recovery? The answer is when house prices stop falling.

Amid our anger over bankers’ fat pensions and the gruesome stock market, it’s easy to forget it was the “delinquency” rate among sub-prime mortgages in the Unite States that started this crisis. Banks simply can’t put a price on the sub-prime mortgage packages (called “asset-backed securities”) that Wall Street conned the rest of the world into buying.

Once house prices stabilise, then so will these toxic assets, and, the thinking goes, they could even be revalued upwards. Trouble is, there’s no evidence yet that US house prices have hit bottom. They have fallen even faster than in Britain and, as US unemployment climbs towards 10%, few are brave enough to call the bottom of the market.

A major problem is that the cut in Fed interest rates to zero has not been passed on to US mortgage holders. TV adverts try to tempt borrowers with new loans at 5% to 5.5%, not the sub-4% now common in the Unnited Kingdom. Not surprisingly, there are few takers.

Economists who, just weeks ago, were pencilling in a United States recovery to start in late 2009, are pushing back their forecasts to 2010 or later. What lessons are there for households? Perhaps the most obvious is that anyone hoping for an early recovery in house prices elsewhere can forget it. Savers, hoping for better interest rates, will also get short shrift for their thrift. Global interest rates may stay lower for longer than many think. Be grateful if you can find accounts paying much more than 2%. The financial question I’m asked most frequently these days is whether you should have a mortgage with a fixed interest rate or one that tracks base rate.

The fixers reckon that reckless money printing (aka “quantitative easing”) will result in wild inflation, which will be countered by steep rate rises. Ergo, it makes sense to fix at low rates now. The trackers reckon that rates will stay low long enough to warrant taking the risk.

After my visit to the United States, I’m tempted to side with them. My guess is that policymakers, burned by accusations that they were too late in bringing down rates, will be loath to raise them next year and snuff out any nascent recovery. They will turn a blind eye to signs of inflation until they are absolutely forced to act. But I will happily revise that position just as soon as any evidence emerges of United States house prices stabilising.