In US housing slump, wider concerns rise

New home construction fell 6 percent in August. Talk of 'recession' ensues.

These are tough times for the people who use hammers and nails to build the American dream – and those who employ them.

In some markets, buyers have gone missing – glued to their money in the expectation that home prices will fall. Desperate, sellers and developers are trying to sweeten their deals to unload McMansions and houses built on speculation. Now comes the news that new construction on homes has fallen so sharply that some economists use the "R" word when they talk about the housing market – and warn about what that might mean for the economy as a whole.

"Housing's in a recession, there are no two ways about it," says Paul Kasriel, chief economist at Northern Trust Co. in Chicago. "Typically when we get declines in housing of this magnitude, with a lag, the economy goes into recession. There have been exceptions, but not many."

Tuesday gave economists more cause for concern. The government reported new home starts fell 6 percent in August compared with July.

New home construction is now down about 20 percent compared with last year. There are seven months of unsold homes waiting for buyers – a record number.

The housing slump won't be welcome news in Washington when the Federal Reserve meets Wednesday to set interest-rate policy. Partly because of the problems in the housing sector, economists expect the Fed to leave interest rates unchanged as it did last month.

"Housing is a big worry for the Fed," says Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Fla. "At the start of the year they expected an orderly decline, but this summer the market started to fall apart."

Despite the drop in the housing market, many economists continue to forecast that the economy as a whole will weather the slump. Retail sales and employment remain healthy. Gasoline prices have fallen almost 50 cents a gallon in the past month. The Dow Jones Industrial Average is close to its all-time highs.

"It does not appear the bottom will fall out by any means," says Peter Morici, a professor at the University of Maryland School of Business in College Park. "I think lower oil prices – they are now down $15 a barrel – have taken any further slowdown off the table."

Economist Stuart Hoffman echoes this optimistic view. He says business will get a boost from exports as the rest of the world's economy grows. He notes that commercial construction, road work, and new warehouses are improving and will partially offset the drop-off in housing.

"You have to look at where housing is coming from," he says. "We knew it was frenzied in terms of starts and sales. But compared to the last few years, this would be considered a normal year."

However, Mr. Kasriel says, there is no clear sign of a bottom in housing. In July the number of homes for sale rose 35 percent while the number of new homes sold fell 15 percent. "We haven't seen such a wide disparity since 1984, when these data started," he says.

Despite these numbers, some economists are predicting the housing market will start to stabilize. David Wyss, chief economist at Standard & Poor's, is forecasting new housing construction will fall 25 percent from 2005 levels. He expects some overly hot markets will see prices fall. Nationally, he anticipates home prices will flatten out.

"We're in the stage now where people are beginning to lower their price or take what they can," he says. "The third stage wrings out the excesses. A year from now will be the best time to buy."

To move houses, real estate developers are trying to entice buyers with some unusual efforts. Indianapolis-based Davis Homes is straddling the line between builder and real estate agency. For a fee, Davis will buy a customer's old home if it isn't sold by a certain amount of time. The strategy frees the customer from shouldering two mortgages on two houses – and it helps Davis sweeten its deals for building new homes.

"It's just another avenue to get clients to their new home," says Cathy Epps, director of the company's Guaranteed Sale program. "Whoever thought of it, I think it was a great idea."

Alongside the Guaranteed Sale program that Ms. Epps directs, Davis also helps potential customers spruce up and sell their homes so they can buy new ones.

Matt Bradley contributed to this report from Boston.

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