Economists are giving up on the idea that the U.S. housing slump will be quick and relatively painless. Instead, more are concluding, the downturn that began nearly two years ago will last at least through the end of 2007, remaining a major drag on the U.S. economy. The culprits: a glut of homes for sale and growing caution among lenders who now regret being so free with their mortgages during the boom.
Most forecasters still expect the economy to regain some momentum this year after a slow first quarter. Recent data have shown manufacturing, business investment and trade on track to help offset the negative effects of falling home values on consumer spending. Even so, some economists expect economic growth this year to remain tepid, largely because of the weak housing market.
This worry coincides with a surge of inflation anxiety that has roiled stock and bond markets in recent days. Yields on 10-year Treasury bonds, which influence the cost of various forms of borrowing throughout the economy, have risen above the psychologically important 5% level to the highest point in nearly 11 months. That in turn has led to a big drop in stock prices: Both the Dow Jones Industrial Average and the Standard & Poor's 500 fell nearly 2% for the week after hitting all-time highs early on.
The rise in interest rates is only adding to the gloom. The average rate for 30-year fixed-rate mortgages stood at about 6.65% Friday, up from 6.35% in early May, according to HSH Associates, a financial-publishing firm in Pompton Plains, N.J. Though that rate remains far below the 8.2% average of the 1990s, the recent jump makes it harder for many Americans to afford new homes. "That's putting more pressure on housing and delays its ultimate recovery," says Andrew Tilton, a senior economist at Goldman Sachs in New York.
Federal Reserve Chairman Ben Bernanke acknowledged in a speech Tuesday that the housing market remains weak, and warned that residential construction "will likely remain subdued for a time, until further progress can be made in working down the backlog of unsold new homes."
The market started to cool in mid-2005 after a buying frenzy that drove up the average U.S. home price nearly 60% in the first half of the decade and more than doubled prices in many areas near the East and West coasts.
Late last year, some economists were saying the market would start bouncing back by the middle of 2007. That hasn't happened, partly because inventories of unsold houses have continued to grow and a surge in mortgage defaults has made lenders much more reluctant to grant credit to people with spotty payment histories.
David Resler, chief economist at Nomura Securities International Inc. in New York, says he is surprised by the degree to which speculation caused builders to overestimate demand, leaving a glut of houses and condominiums.
That means single-family housing starts, which have declined 33% since early 2006 to a seasonally adjusted annual rate of about 1.2 million in April, will remain low, around the current level, through the first quarter of 2008 before starting to recover gradually, Mr. Resler predicts. Goldman's Mr. Tilton thinks single-family starts will drop to an annual rate of one million or so before bottoming out in the second half of this year.
Reflecting this worse-than-expected slump, Mr. Resler recently trimmed his forecast for economic growth in the second half of this year to an annual rate of 2.8% from 3%. He sees about a 33% chance that the U.S. economy will slip into a recession in the next year. If it does, he says, the weak housing market would be largely to blame. Among the risks, he says, are that depreciating home values will make consumers more cautious in spending and that many more housing-related jobs will be lost.
For more on the Housing Slump click on title above.
Most forecasters still expect the economy to regain some momentum this year after a slow first quarter. Recent data have shown manufacturing, business investment and trade on track to help offset the negative effects of falling home values on consumer spending. Even so, some economists expect economic growth this year to remain tepid, largely because of the weak housing market.
This worry coincides with a surge of inflation anxiety that has roiled stock and bond markets in recent days. Yields on 10-year Treasury bonds, which influence the cost of various forms of borrowing throughout the economy, have risen above the psychologically important 5% level to the highest point in nearly 11 months. That in turn has led to a big drop in stock prices: Both the Dow Jones Industrial Average and the Standard & Poor's 500 fell nearly 2% for the week after hitting all-time highs early on.
The rise in interest rates is only adding to the gloom. The average rate for 30-year fixed-rate mortgages stood at about 6.65% Friday, up from 6.35% in early May, according to HSH Associates, a financial-publishing firm in Pompton Plains, N.J. Though that rate remains far below the 8.2% average of the 1990s, the recent jump makes it harder for many Americans to afford new homes. "That's putting more pressure on housing and delays its ultimate recovery," says Andrew Tilton, a senior economist at Goldman Sachs in New York.
Federal Reserve Chairman Ben Bernanke acknowledged in a speech Tuesday that the housing market remains weak, and warned that residential construction "will likely remain subdued for a time, until further progress can be made in working down the backlog of unsold new homes."
The market started to cool in mid-2005 after a buying frenzy that drove up the average U.S. home price nearly 60% in the first half of the decade and more than doubled prices in many areas near the East and West coasts.
Late last year, some economists were saying the market would start bouncing back by the middle of 2007. That hasn't happened, partly because inventories of unsold houses have continued to grow and a surge in mortgage defaults has made lenders much more reluctant to grant credit to people with spotty payment histories.
David Resler, chief economist at Nomura Securities International Inc. in New York, says he is surprised by the degree to which speculation caused builders to overestimate demand, leaving a glut of houses and condominiums.
That means single-family housing starts, which have declined 33% since early 2006 to a seasonally adjusted annual rate of about 1.2 million in April, will remain low, around the current level, through the first quarter of 2008 before starting to recover gradually, Mr. Resler predicts. Goldman's Mr. Tilton thinks single-family starts will drop to an annual rate of one million or so before bottoming out in the second half of this year.
Reflecting this worse-than-expected slump, Mr. Resler recently trimmed his forecast for economic growth in the second half of this year to an annual rate of 2.8% from 3%. He sees about a 33% chance that the U.S. economy will slip into a recession in the next year. If it does, he says, the weak housing market would be largely to blame. Among the risks, he says, are that depreciating home values will make consumers more cautious in spending and that many more housing-related jobs will be lost.
For more on the Housing Slump click on title above.
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