Housing Sector Continues To Threaten Economy genre: Econ-Recon

Unsustainable

Despite Federal Reserve Chairman Bernanke's efforts to soothe concerns about the housing industry and the sub-prime lending crisis, the latest home sales figures paint a picture that may signal a much broader economic downturn. Recent indicators suggest that the worst may well be yet to come.

WASHINGTON - Sales of existing homes fell for a fourth straight month in June and even a small increase in home prices was not enough to lift the gloom surrounding the housing industry.

The National Association of Realtors reported that sales of existing homes dropped by 3.8 percent in June to a seasonally adjusted annual rate of 5.75 million units, the slowest sales pace in 4½ years.

Federal Reserve Chairman Ben Bernanke told Congress last week that he expected housing demand to stabilize and housing to be a less severe drag on growth in the coming months.

However, private economists said the existing home sales report raised serious questions about that assessment. They noted that existing home sales were falling at an annual rate of 28 percent in the second quarter, the steepest plunge so far in the downturn.

The Realtors are forecasting that sales of existing homes will fall by 5.6 percent this year with prices dropping by 1.4 percent. That would mark the first annual price decline on record.

Lawrence Yun, senior economist for the Realtors said that if the price decline turns out to be greater than he is forecasting that would raise concerns that consumers could cut back on their spending by enough to raise worries about a possible recession for the overall economy.

Yun's forecast may be accurate though the bulk of recent news with regard to the housing industry and the economy has been worse than anticipated...suggesting that the guarded optimism may be unwarranted.

I'm inclined to think that the bottom has not yet been found and that the sub-prime lending mess coupled with slow home sales and questions about declining home prices will lead to reduced consumer spending. If that occurs, the entire economy would be impacted and that could lead to advancing recessionary pressures.

I worry that the recent boom years in the housing industry resulted from artificially low interest rates that cannot be sustained. Those rates afforded many consumers the ability to spend more money which kept the general economy growing. If the housing industry continues to suffer and access to mortgage products becomes more restrictive, consumer liquidity will drop. If this scenario were to become pervasive, a recession is plausible.

Tagged as: Ben Bernanke, Economy, Federal Reserve, Foreclosures, Housing, Interest Rates, Real Estate, Sub-prime

Daniel DiRito | July 25, 2007 | 9:42 AM
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