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The pessimists, who include billionaire financier George Soros and prominent economists Stephen Roach of Morgan Stanley and Professors Paul Krugman of Princeton and Nouriel Roubini of New York University, suggest the problem is serious and, with varying degrees of certainty, could lead to a recession. There is some data to support the pessimistic view: existing home sales, which account for about five-sixths of total US home sales, fell 4.1 per cent in July and more than 11 per cent year on year, while new home sales (the other one-sixth) dropped 4.3 per cent in July and a whopping 21 per cent year on year. Inventories are rising and the number of unsold homes is the highest in about 13 years. In those areas that experienced sharp price run-ups in the past six years, such as New York and Washington DC, real estate values are dropping sharply. The upshot of all this could, according to some of the pessimists, be serious.

Given that housing is a key component of demand, a real estate slump can have a devastating impact. Prof Roubini suggests this will be greater than the technology bust of 2000/2001 because, among other reasons, it affects far more people. The US Federal Reserve will not be able to prevent a recession through rate cuts, he adds, partly because the lagged effects of recent rate increases have yet to work their way through the economy. Moreover, a US recession will be transmitted to the rest of the world through trade flows and asset market declines elsewhere. And US equity markets - as well as the dollar - could be in for a rough ride in 2007.

However, not all observers are as alarmed. Many point out that the macro picture is certainly not that bad: retail sales and orders for durable goods jumped in July, mortgage rates are leveling off - and indeed are still reasonably low by historical standards - and business capital spending has been good. Moreover, the housing declines are prominent only in those areas where there were speculative excesses, not throughout the country. The consumption effects of a softening housing market have not become visible either. Nor are people about to dump their homes the way they dumped stocks. The likely end result? A slowdown, possibly, but not a recession.

For its part, the Fed does not, as yet, seem deeply concerned about the housing bubble. In his testimony to the US Senate Committee on Banking, Housing and Urban Affairs on July 19, Fed Chairman Ben Bernanke noted that while the housing market is 'cooling', house prices are still rising for the nation as a whole, though by much less than before. Moreover, 'favourable fundamentals, including relatively low unemployment and rising disposable incomes, should provide support for consumer spending. Overall, household expenditures appear likely to expand at a moderate pace, providing continued impetus to the overall economic expansion'. This is hardly recession talk. It remains to be seen whether the Fed changes its view when it meets to decide on interest rates on Sept 8.