Even a Flat Housing Market Could Cut Growth ; A Slowdown Might Halve the Rise in GDP by 2007, Some Forecasters Say

By Mark Trumbull writer of The Christian Science Monitor | The Christian Science Monitor, December 9, 2005 | Go to article overview

Even a Flat Housing Market Could Cut Growth ; A Slowdown Might Halve the Rise in GDP by 2007, Some Forecasters Say


Mark Trumbull writer of The Christian Science Monitor, The Christian Science Monitor


Even without a full-scale downturn in real estate, the dynamics of the housing market could exert a significant drag on economic growth in the next year and beyond.

By some forecasts, a slowdown in real estate could nearly halve the economy's growth rate by 2007. And though the threat of recession is generally viewed as distant, it's even conceivable that a softer housing market could set the stage for an economic slump.

Real estate sales and home construction have often bounced the economy up and down. But now, amid signs that higher interest rates are starting to cool the economy's hottest sector, there's an additional ripple effect for US consumers: less ability to tap home equity as a source of income.

That phenomenon, dubbed "equity extraction," has provided crucial cash to the economy in recent years, helping consumers consistently surprise economists with their ability to keep spending.

All this makes housing a pivotal indicator as the US economy enters 2006.

"It's the biggest issue for the year ahead," says Ed McKelvey, an economist with investment house Goldman Sachs in New York. "We are estimating a 1.5 percent potential hit" to America's gross domestic product (GDP).

Such a change wouldn't happen all at once. Housing market forecasts vary, but many economists say a cooler period could last for several years. And the impact on GDP, too, would be felt gradually.

For Mr. McKelvey, the biggest impact would come late next year and into 2007. Until then, any housing slowdown would scarcely register, according to Goldman Sachs. Its official forecast for next year shows GDP growing strongly at 3.6 percent, almost identical to this year. And other firms also have concerns about the ripple effects of a housing slowdown, tempered by the healthy state of the general economy.

For example: the Anderson Forecast, put out by the University of California, Los Angeles, this week predicted that the housing sector may already be slowing the economy, as of the current quarter. It predicted a sustained slowdown in housing that could last several years, according to a summary of the report by the Associated Press. The forecast stopped short of predicting a recession, but said that as many as 500,000 construction jobs and 300,000 financial-sector jobs tied to real estate could be lost as the cycle plays out.

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