Housing slump will slow growth, economists say

Northwestern Financial Review, Feb 1-Feb 14, 2007 by Nelson, Becky

Slowing in the housing market will dampen consumer spending in the year ahead and will, in turn, impact the nation's economy, two economists said at the Wisconsin Economic Forecast Luncheon on Jan. 9 in Madison.

The weakness in housing and manufacturing, particularly in the automotive industry, will follow through in consumption and consumer spending, said Sam Kahan, senior economist at the Federal Reserve Bank of Chicago's Detroit office, to the audience of 310 banking and business professionals.

Still, the expectation of a recession remains relatively low, he said. Unemployment is at 4.5 percent, expected to rise modestly. National economic growth is projected to be a moderate 2.4 percent in 2007. down from 3.3 percent last year.

"But not everything is bad; business expenditures and exports are expected to increase," Kahan said.

Core inflation likely will remain relatively unchanged, in the 2 percent to 2.4 percent range, and interest rates also will stay the course. Long-term rates will be in the 4.5 percent to 5 percent range, he said, and short-term rates could decline slightly in term second half of the year.

The weakening dollar, oil prices, and tariffs that could impede trade are potentially worrisome. Kahan said.

Global economic and political issues are "something that makes me worry more than anything else," the economist said, citing the shaky economy of Russia - a major source of energy and commodities - as one example.

"Are we in the United States insulated from those things enough not to be affected by it, or are we going to be affected by it?" Kahan said.

At the local level, job growth in Wisconsin and Illinois has tracked the national average of about 4 percent. Both states show strength in the professional and business sectors, education and health services, and leisure and hospitality job areas.

Mortgage payments rising

"Housing is no longer the engine of growth that it once was," said John Tuccillo, former chief economist for the National Association of Realtors.

More than $1 trillion in adjustable-rate mortgages, or about 10 percent of the total U.S. mortgage debt, will be repriced upward this year, said Tuccillo, who now runs his own consulting firm.

The average consumer who does nothing would see payments rise by 25 percent, he said. Many will refinance into new ARMs and "start the clock ticking again." Others will opt for fixed-rate mortgages and take the higher payments in exchange for stability, he said.

"The degree to which customers react to that repricing by absorbing higher mortgage payments will determine how consumption -spending goes for the rest of 2007," Tuccillo said.

How much the housing downturn will affect a particular area depends on three factors, Tuccillo said: how much the population is growing, whether employment is growing, and how much speculation is in the market.

The market will bottom out in the first half of 2007 for areas where there hasn't been much speculation or job loss, he said. Other areas could be impacted into the second quarter of 2008.

The housing market will turn upward again because of shifting demographics, Tuccillo said. For baby boomers, "the second-home market is becoming huge," he -said. Looking ahead. Generation Y, born after 1977 - will create another wave in the housing market from 2010 to 2020, ho predicted.

Elevating the industry's image

This year's packed room of bankers, realtors, professional association staff, legislators and state officials demonstrates the forecast luncheon is well on its way of fulfilling its mission: to help brand bankers as a key source for economic information.

Organized by the Wisconsin Bankers Association, it's one of two initiatives WBA began in 2004 to "elevate the industry's imago, influence and prestige - all of which helps WBA's advocacy efforts," said Kurt Bauer, WBA president/CEO.

The other initiative is a twice-yearly economic conditions survey of bank CEOs, which taps into their knowledge of trends and insight into potential problem areas.

Attendance was up from 230 people last year. BauEr attributes the growth in part to an increase in the number of sponsors and media partners, which provided in-kind donations of print and radio advertising. Twelve organizations co-sponsored this year's forecast, up from three last year.

To generate additional media attention, WBA issued the results of its latest economic survey a week earlier, resulting in statewide news stories beforehand as well as newspaper and online coverage of the forecast.

Shortening the event from three speakers to two and including time for networking, were improvements to this year's forecast event, Bauer said.

"We will likely make other refinements for next year, including moving the event to a larger facility," he said.

By Becky Nelson