- The Washington Times - Tuesday, April 24, 2007

The crunch in mortgage lending took a toll on the housing market and consumer confidence last month, helping to send home sales plummeting 8.4 percent, the biggest drop in nearly two decades, and contributing to a record eighth months of decline in home prices.

Realtors say they expect the usually brisk spring housing market to be sluggish again this year, with many predicting no real recovery until 2008. The sales pace last month of 6.12 million units reported by the National Association of Realtors was the lowest since June 2003, while the last time existing-home sales dropped so much was January 1989.

Mark Zandi, an analyst with Economy.com, said the lending crunch caused by a surge in mortgage defaults and foreclosures has considerably darkened the outlook for housing. He expects the average price of homes to drop by 10 percent nationwide before the market can start recovering next year, with larger drops in areas like Washington, where prices became way overblown.

Homeowners will have to slash prices just as homebuilders are cutting construction because they are competing with an unprecedented inventory of 1 million homes for sale around the nation, he said.

“We’ve got to make a big dent in those numbers” before we see the bottom in housing, he said. “This has got a way to run. We need to see some big changes in terms of pricing or construction. … I assume most of the clearing will be done in price.”

While prices already have dropped, the decline in the last year so far has been minor on average — 0.3 percent. Mr. Zandi noted that the double-digit drops that he and other economists are predicting will put millions more homeowners at risk of losing their houses because they have less than 10 percent equity and will be “upside down” on their mortgages just as they are resetting at higher interest rates.

“It’s not good for the economy,” he said. “It’s soft and it’s going to get softer.”

The recession in housing already has shaved a percentage point off the economic growth rate, but the biggest hit to the economy would come if consumers get spooked by the fall in home prices and pull back on spending, he said. Consumer spending spurs about 70 percent of economic growth.

Signs that could be happening emerged yesterday as the Conference Board reported a second monthly drop in consumer confidence. Besides the housing slump, sharply rising gas prices were behind the weaker reading, combining to produce a significant deterioration in consumers’ assessment of their financial situations.

“This warrants monitoring in the months ahead, as further declines would suggest a softening in growth,” said Conference Board economist Lynn Franco.

While consumers have kept up spending in spite of the adversities, Mr. Zandi said they will have to retrench as house prices fall because many went deeply into debt and stopped saving based on the assumption that their home values would keep rising and adding to their wealth.

Millions of homeowners tapped into their rising housing wealth with cash-out refinancings and home equity loans between 2000 and 2005, and the drop in home prices will force those consumers to pause and start saving again, he said.

“I would be shocked if we don’t see some pullback in consumer spending,” he said, though it should be limited by continuing gains in jobs and incomes. “I think consumers are going to bend, but they’re not going to break.”

By next year, the housing crash not only will be the biggest question mark looming over the economy, but it also “may be the most important economic issue in the presidential debate” because of the immense “resonance” among consumers and homeowners as they see neighbors and relatives struggle and lose their homes to foreclosure, he said.

Economists said bad weather contributed to the big drop in March home sales, just as relatively mild winter weather had lifted sales in previous months.

But David Lereah, chief economist of the National Association of Realtors, said tightened mortgage lending standards also are starting to crimp the market.

“The negative impact of subprime is considerable,” he said. “I expect sales to be sluggish in April, May and June.”

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