Some Economists Believe Slow Housing Market Spells Recession in 2007
The unemployment rate is the lowest it’s been in years.
The stock market is at an all-time high.
Corporate profits are up 17 percent.
As we look to 2007, the economy appears to be in great shape, right? Well, that depends who you ask.
Economists, a professionally gloomy bunch, are worried, and a few of them are even using the dreaded “r” word, calling for a recession in 2007. One expert puts the odds at 80 percent.
There is, of course, a reason for the gloominess and it can be summed up by the fact that the U.S. housing market is taking a beating. In October, housing prices were almost 10 percent lower on average than they were a year ago, the largest yearly decrease since 1970.
The prices of new homes have taken the worst beating, plunging 33 percent just since April. More people are having trouble making mortgage payments. As a result, foreclosures are up nationwide, 43 percent higher than at this time last year, in fact.
We should have seen it coming. The bust in the U.S. housing market is not surprising, according to the Indianapolis Star. In June 2005, communities’ housing prices had risen into the stratosphere across the nation. One does not need to be a glum economist to believe that at some point those prices have to retreat.
The only question was: As mortgage rates increase, would the market cause the economy as a whole to sink? The answer to that question has still not been answered fully, but there are reasons to be pessimistic.
The most ominous sign was the recent report of Gross Domestic Product, the most common gauge of economic performance. In Q3 of 2006, the economy grew by only 1.6 percent, the slowest rate in 3 1/2 years.
There are other troubling signs as well, as U.S. manufacturers are reporting a slowdown in new orders, and construction of non-residential buildings is also on the decline. Of course, the favorable unemployment numbers would seem to be an argument against gloom and doom, but analysts are cautious in that regard as well. Most recessions begin at the point where the unemployment rate hits its low point of the business cycle.
Still, there are plenty who see home sales bouncing back or leveling off at worst, and nothing like a recession on tap for 2007. On top of good employment numbers, they point to falling oil prices, high corporate profits and an increase in world demand for U.S.-made goods.
“The effects of the housing correction will be entirely contained within the housing sector,” claims one economist.
So who’s right? There’s no crystal ball or macroeconomic computer model to divine the future. But the pessimists make a compelling case. Housing has fueled consumer spending through home equity loans and represents the most important source of wealth for most Americans.
The estimated value of residential real estate is more than $20 trillion, and anything that puts a crimp in that value is going to make consumers more cautious in the future. Some cities like Indianapolis have not seen a housing bust, and Indiana home mortgage demand hasn’t fallen hard. But in much of the rest of country, signs point to a serious market correction.
Mixed signals probably mean we will avoid the worst-case scenarios and the economy will avoid recession but limp through 2007. If they’re proven wrong, it wouldn’t be the first, or the last time. But a dim real estate market makes it more likely that the pessimists will be proven right.