Housing market slowdown rippling across the economy

A nationwide housing boom gave the current economic expansion its biggest boost. Now, a housing dip is raising the prospect of a slower economy ahead.

After another monthly dip in June, sales of previously owned homes have fallen in all four major regions of the United States from a year ago, with nationwide sales volume down 9 percent, according to a report released Tuesday by the National Association of Realtors.

Home prices have flattened, up just 1 percent from a year ago, when housing activity peaked.

And in some metro areas, such as here in Boston, home prices have fallen on average over the past year.

These trends are rippling into the broader economy. Home builders, among the most impressive contributors to gross domestic product (GDP) in recent years, are scaling back their plans. And millions of consumers face indirect effects: With interest rates rising even as home prices stall, fewer people can borrow on home equity as a source of free cash. Many others – those with adjustable-rate loans – are now being hit by a jump in their mortgage payments.

The question is how far housing's slowdown will go, and how fast. So far, the impact on the overall economy has been, in the words of Federal Reserve Chairman Ben Bernanke, "orderly."

Economists generally expect that it will remain that way, although some high- flying real estate markets may face a harder fall.

"We don't think it's going to be a disaster. It's just going to be bad," says David Wyss, chief economist at Standard & Poor's in New York. Although a housing bust has often been a precursor of recession in the past, "it hasn't been recently."

What this housing downturn could do is slow the pace of economic growth significantly.

Economists at Merrill Lynch, for example, reckon that the dive in homebuilding alone could subtract a percentage point from overall gross domestic product in the third quarter, tugging GDP growth down to perhaps 2.5 percent, annualized, for that quarter.

And recession is a real possibility, in the view of Merrill Lynch's David Rosenberg. After the past 10 peaks in new-home starts by builders, an economy-wide slump has followed seven times. Housing starts, like home sales, peaked last summer.

The effects of a housing downturn are both direct and indirect.

Residential construction has become a larger force in the economy, rising from about 4.5 percent of GDP to 5.5 percent since 1990. But in the months ahead, builders won't be hammering out much of an addition to GDP. Last week, the National Association of Home Builders index of contractors' sentiment fell to a 14-year low point.

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