How the Housing Downturn Will Affect the Rest of the Economy

Trends: The housing downturn will cause rising unemployment, a deep recession in the housing market, a consumer under siege, and a visibly slowing economy.

John Mauldin at InvestorsInsight predicted the credit crunch from subprime mortgages many months ago, when most experts said the damage was contained. Here are his predictions for the effects. Excerpts below.

Link: InvestorsInsight : Thoughts From The Frontline

First, rising home values have allowed homeowners to use their homes as an ATM through mortgage equity withdrawals, which have added almost 2% to GDP annually over the last five years. That is now evaporating.

Secondly, falling home construction and lower home sales means fewer jobs not just in the direct home building market, but in the parts of the economy related to the home building markets, like mortgage brokers, real estate agents, hardware and furniture, etc. As an example, Countrywide announced a planned 10-12,000 person lay-off, when just a few weeks ago they were thinking of expansion, as they now think new mortgages may drop 25% in 2008. Fewer jobs mean lower consumer spending.

Consumers are not going to spend as much due to the wealth effect. If you feel your house was going to be a major part of your retirement, and now the value is going down, you are going to be more cautious and actually think about saving. This has been a dangerous prediction for 50 years, but I think consumer spending, some 71% of the US economy, is due to slow down. Year over year growth could drop below inflation later this year.

Further, with all the additional homes coming onto the market due to foreclosures, hone values are going to drop even more, and new home construction, which peaked at an annual run rate of 2,000,000 homes per year, is likely to fall to less than 1,000,000. We are currently at a level of 1,400,000, so we are not yet close to the bottom.

Comments

[Thomas]

Oh lord, not another wild speculation based upon the "echo chamber of fear" that currently pervades the amateur media. C'mon, the housing correction is not going to destroy our economy, it's just exercising the more excessive parts of our economy off of the waistline. It's a good thing and there are plenty of other areas besides housing that are doing just fine. Enough with the chicken little schtick.