Forget what you’ve heard about the good news about housing sales. The real action is in housing prices, which dropped 9 per cent year over year. That kind of decline will cause a huge uptick in defaults, as many homeowners discover they have no equity in their home. Since this decline is on the high end of the scale of most estimates, we should get ready for another round of writedowns in mortgage backed securities. Worse, the decline going to wipeout consumer spending.
A few months ago, Dean Baker explained how bad this level of decline in housing prices will be for consumption.
Falling home prices are now eating away at family wealth. Noted economist Dean Baker of the centre for Economic and Policy Research in Washington, DC, projects that a 10 per cent decline in national housing prices will, by 2009, lower the household wealth of a typical U.S. family in the 45 to 54 age cohort by 35 per cent.
“With both wages and home prices falling, and savings rates close to zero, families are being squeezed in a way that is likely to depress consumption spending in the months ahead,” Price said. “Since consumption makes up about 70 per cent of Gross Domestic Product, these trends do not bode well for the broader economy.”
Earlier: New Home Sales Up