Record-setting Housing Slump Continues
Down 6.7% from this time last year, U.S. home prices continue to fall sharply across most of the nation, with the deepening slump in the housing market threatening to dampen consumer spending, according to the S&P/Case-Shiller home-price index released by Standard & Poor’s. This amount exceeds the previous record year-to-year decline of 6.3% in April 1991, when the economy was emerging from a recession.
What some are calling the “silver lining” in this data is that it may signal that the market is making what most economists see as a necessary adjustment, dragging home prices back into closer alignment with Americans' ability to pay. The market is working its way "back to reality," says David Seiders, chief economist of the National Association of Home Builders. Seiders believes house prices will bottom out by early 2009.
Others aren’t so sure. Counters Michelle Mayer, an economist with Lehman Brothers, "The housing shock is only about halfway over, and housing prices will continue to fall well into 2009."
The housing boom that occurred in the first half of this decade led to fast-rising home prices which made it easy for homeowners to take out home-equity loans or refinance their primary mortgages to extract some cash. That, in turn, helped sustain consumer spending, which accounts for about 70% of U.S. economic activity.
Economists now are concerned that the decline in home prices will prompt consumers to tighten spending enough to slow growth or even tip the economy into recession. "Eventually what's happening in the housing market is going to catch up with us," notes Patrick Newport, an economist at research-firm Global Insight Inc.
Worries about a sharp decline in consumer consumption were laid to rest to an extent last week after reports from the government found that consumer spending in November grew at the fastest pace in three and a half years. And though holiday sales fell short of retailers' expectations, consumers, lured by deep retail discounts, did hit the stores heavily in the final days before Christmas. As a result, ultimately economists say that even if overall spending slows in December, the strength seen in October and November would be enough to keep the economy afloat in the near term.
According to the S&P/Case-Shiller index, some of the fastest declines in home prices are in metropolitan areas that were among the hottest during the housing boom. Prices were down 12.4% from a year earlier in Miami, 11.1% in San Diego, 10.7% in Las Vegas and 10.6% in Phoenix. Home prices are still up from a year ago in some cities, such as Seattle and Charlotte, N.C. And most people who purchased homes several years ago, regardless of location, are still sitting on sizable gains.
Published on December 27, 2007
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