Academic journal article ABA Banking Journal

Will Housing Push Us into Recession?

Academic journal article ABA Banking Journal

Will Housing Push Us into Recession?

Article excerpt

A POPULAR JOKE TELLS US that economists have forecast nine out of the last five recessions. Economists always seem to be warning of one risk or another. Over the past few years, the risk most commonly cited has been the housing market.

There is no doubt that the housing market is going through a correction, and how this correction unfolds will influence the course of the economy in coming quarters. Fortunately, the housing correction to date--as distinguished from the low end of the mortgage market--has been more gradual and orderly than most people expected. The housing sector affects the general economy mainly through: 1. residential investment, 2. construction employment, and 3. wealth effect on consumer spending.

It is worthwhile to examine whether any of these factors can be a cause for the next recession.

First, let's consider investment. Housing investment occurs in two ways: new home construction, and upgrading of existing properties. The second quarter real Gross Domestic Product growth was 3.4%. Weak residential investment subtracted almost half a percentage point from overall GDP growth in the second quarter. The drag from the housing sector, however, lessened to -9.3% from -16.3% in the first quarter.

According to the Census Bureau, the number of housing units being constructed across the country dropped 24.2% on a year-over-year basis as of May. The GDP number looks considerably better, because it includes investment in existing properties as well. Work related to existing homes has picked up lately, because sellers now have to upgrade their properties in order to attract buyers. …

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