Tuesday, March 29, 2011

Housing Problems Resurface

There have been several updates on the housing market in the past couple of weeks, and none have been very encouraging. This morning brought the latest reading of the S&P Case/Shiller Home Price Index, and it showed that housing prices are falling anew. The 20-city composite has fallen to its lowest point since May 2009.

It’s certainly not “news” that the housing market is struggling mightily. The stock market has adjusted by punishing home builders and other housing-related stocks. In terms of the economy, housing’s share of GDP has fallen from 6.3% back in 2005 to 2.3% last year, so it has a much smaller impact.

No, the bigger concern is the secondary effects that another leg down in prices may have. Specifically, large financial institutions are still carrying very large inventories of houses, which may create another wave of losses if price declines lead to even more defaults and foreclosures. At the consumer level, a drop in price will increase the ranks of homeowners who owe more on their houses than they’re worth at the same time that gas prices are soaring, potentially creating a big drag on future spending.

The bottom line is that problems in housing aren’t totally yesterday’s news, and we need to keep a close eye on developments there because of potential spillover effects into other important parts of the economy.