- The Washington Times - Friday, March 24, 2006

The downturn in the housing market is deepening, with new home sales at a nine-year low, prices down for the fourth month in a row and mortgage applications at their lowest point in three years.

Last month’s 1.08 million rate of new home sales was 10.5 percent below January’s rate and down 13.4 percent from a year ago, the Commerce Department reported yesterday.

New home prices have declined steadily from a median of $243,900 in October to $230,400 last month, the agency said.

The rapidly decelerating housing market is causing concern on Wall Street and at the Federal Reserve. A collapse in the market is one of the biggest risks facing the U.S. economy because it would drag down consumer spending that has been closely linked to climbing house prices and kill thousands of high-paid jobs in the real estate industry.

“Bubbles burst, they really do,” said Joel Naroff of Naroff Economic Advisers. “The Federal Reserve has to be concerned that just may happen, which could make them more cautious going forward.”

The Fed is scheduled to meet on Tuesday to decide on raising interest rates once again. While most Fed-watchers say another rate increase is in store next week, the faltering housing market may influence the Fed to consider pausing later this spring.

Federal Reserve Bank of Boston President Cathy Minehan said this week that the Fed’s forecast of “solid growth” in the economy this year was predicated on the housing market cooling off or leveling. But anything more dramatic than that would be “a downside risk to growth,” she said, because it would cause consumers to stop using their houses like ATMs and cut back on spending.

“We see construction diminishing somewhat and real estate prices flattening, not declining,” she said. “Clearly, however, we could be wrong on the magnitudes.”

Housing wealth, which surged by $5 trillion in the first half of the decade, has been a powerful generator of consumer spending since nearly 70 percent of American households own homes. Consumers liquidated as much as $600 billion of their home equity last year to spend and invest, according to the Federal Deposit Insurance Corp., eclipsing their $375 billion gain in after-tax income.

Mr. Naroff said the home market’s steep decline since the fall may start snowballing and affecting consumer wealth. Already, sluggish sales and traffic have prompted homebuilders to offer discounts and incentives on homes for sale, but they will have to start cutting prices in earnest if they want to unload the record inventories of unsold homes they’ve been accumulating, he said.

Unsold new homes totaled 548,000 last month or 6.3 months of homes at the current sales rate — a stunning 45 percent above year-ago levels, according to the department.

“The product overhang just keeps growing,” in both the markets for new and existing homes, where unsold homes also are at record highs, said Mr. Naroff.

“Declining new home prices would ultimately spill over into the existing home market,” where the consuming public would start to feel the pinch, he said.

Economists say falling home prices could wreak disaster on consumer finances, not only by preventing many from cashing into home equity as they have been to boost their incomes and spending, but also by putting many borrowers on shaky financial ground because they took out huge mortgages with backloaded payment schedules to purchase their homes.

Meredith Whitney, executive director at CIBC World Markets, said the Fed has been trying to cool down the housing market with sharply higher short-term rates, and that is hurting the most vulnerable borrowers who took out adjustable-rate mortgages keyed to rates driven higher by the Fed.

Caught between the squeeze of rising rates and a falling market, these borrowers — most heavily indebted segment of the consuming public — will fall into a spending slump this year because they have taken on burdensome and risky mortgages and are too overstretched to maintain their spending and debt payments, she said.

“The picture is getting less and less pretty,” said Phillip Neuhart, economist with Wachovia Securities. But he noted that other housing reports, notably one showing a 5.6 percent boost in existing home sales in January due to unseasonably warm weather, are not signaling as profound a weakness as yesterday’s report.

“One month of surprisingly weak new home sales does not constitute a market bust,” he said. “However, if new home sales were to continue their plummet and existing home sales follow suit,” the Fed would have to start worrying about the health of the economy.

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