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.
The indirect effects stem from consumers, whose spending represents two-thirds of GDP. In recent years, rising home prices and low interest rates have allowed them to extract billions of dollars in cash.
Now that gusher is fizzling out.
"Households are beginning to feel the full impact of higher borrowing costs, a softening housing market, and high gasoline prices," Nariman Behravesh, chief economist at the consulting firm Global Insight in Lexington, Mass., wrote in a report this month.
If a construction slowdown represents a cut of nearly 1 percent from GDP growth, the impact from a slowdown in home-equity extraction could be almost as large, some economists say. Fixed-rate mortgage rates have jumped more than a full percentage point during the past year, as the threat of inflation has loomed larger and the Federal Reserve has raised the short-term interest rates it sets.
"The higher the Fed raises interest rates, the worse the problem gets," says Mr. Wyss at Standard & Poor's. "The rising level of home prices has been a big boost for consumers."
But the American economy has behaved in an increasingly resilient fashion in recent years, weathering setbacks such as hurricanes, terrorist attacks, and soaring energy prices.
Many forecasters say that the housing slowdown will be offset, in consumer pocketbooks, by rising pay in the year ahead.
Americans showed some of their renowned economic resilience Tuesday, as a major index of consumer confidence rose slightly for the month, rather than edging down as analysts had predicted.
A generally optimistic view of the job market was a key factor.
Consumers saying jobs are "plentiful" increased to 28.6 percent from 28 percent, while those claiming jobs are "hard to get" remained virtually unchanged at 19.9 percent, reported the Conference Board, a business research group in New York that conducts the monthly survey.
The full extent of the housing slowdown will unfold slowly, and in ways that are often unique to individual markets, economists say.
Often a down cycle involves two or three years of flat or falling prices, followed by a slow recovery.
Prices in the Midwest and South have fallen slightly during those twelve months, while the West has held flat and the Northeast notched 7-percent gains.
But Northeastern cities such as New York remain vulnerable, along with other cities in California and Florida where prices had been soaring at double-digit rates.
"Price reduced!" advertisements increasingly beckon customers in Boston, where median prices fell 1.5 percent over the year ending April 30.
Nationwide, the inventory of homes for sale is up 39 percent – leaving a 7-month supply of homes on the market.
That could leave plenty of time for home buyers to shop around.