A cloud over the economy: the mortgage meltdown is deepening, and prolonging the housing recession. A weak housing sector has ripple effects for the rest of the U.S. economy. Financial markets remain vulnerable to renewed turmoil from hidden exposures to subprime mortgages and related derivatives

Mortgage Banking, Nov, 2007 by Robert Stowe England

Shiller also says the Washington, D.C., area is falling "at a good clip"--7.2 percent year-over-year in July. "New York [City], especially Manhattan, appears stronger than the city as a whole," he says, while the whole New York metropolitan area is weak, with a 3.8 percent decline year-over-year in July. Troubled Midwestern cities, where unemployment is high, continue to slump. Detroit, for example, was down 9.7 percent from a year ago in July.

Despite worries over these troubled markets, not all is doom-and-gloom. The National Association of Realtors found a silver lining in the August rise in the median price of a home, which rose 0.2 percent from July to $224,500. In August 2006, the median was $224,000.

Overall home sales, however, declined in August to an annual pace of 5.5 million from 5.75 million in July, representing a decline of 12.8 percent below the 6.31-million-unit pace of August 2006. Total housing inventory rose 0.4 percent at the end of August to 4.58 million existing homes available for sale, representing a 10-month supply at the current sales pace. That rose from a 9.5-month supply in July.

NAR's Yun found some cause for hope in the numbers for the Northeast region, where the median home price was $282,300, up 3.6 percent from August 2006, even as sales fell 5.7 percent to an annual pace of 1 million.

"The Northeast was the first region to go into a slump," Yun says, tracing the beginning of the slump in the Northeast to the fall of 2005, when sales turned negative. Median prices turned negative in the Northeast in August 2006. The Northeast registered its first median price increase in May 2007, Yun says.

"In recent months, the Northeast has been outperforming the rest of the nation," beginning with its first median price gain in May 2007, he says. August was the fourth straight month the median price in the Northeast had been up, with the average for the last three months at 3.7 percent--"a fairly decent price gain," Yun says.

The NAR data reveal that the West is the most troubled region, with a 9.8 percent drop in existing-home sales to an annual level of 1.01 million, 21.7 percent below August 2006. The median price in August was $332,300, 3.8 percent below the level of a year ago.

Impact on the economy

Yun predicts that the slump in the housing sector will hold economic growth to a 2 percent level for all of 2007. It will not tip the economy into recession, he says, because "business spending is solid and export growth is solid." He predicts that in 2008 home sales will be higher than this year and median prices will also rise, followed by an even better 2009.

Shiller calculates the probability of an economic recession at greater than 50 percent, due mainly to the effect of declining home values on the pace of consumer spending. "When asset prices go down, people are likely to spend less," he says.

Shiller notes that most economic models used to make forecasts do not include a measure of the impact from a collapse of a large portion of the mortgage market on the economy. A lot of blows have hit the economy, and it keeps on chugging, Shiller says, citing the end of the speculative boom in housing, higher oil prices and hits to financial infrastructure. "We've survived that, [but at the same time] it makes people a little bit more edgy," Shiller says. "If we see a lot of foreclosures, it could be interpreted negatively for the economy," he adds.