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Data on Homes Cause Jitters

Housing prices decline nationally for the first time since 1995 and inventory sets a record. The slump poses two big threats to the economy.

September 26, 2006|Tom Petruno | Times Staff Writer

Home prices nationwide declined last month for the first time in more than a decade, raising new concerns about the real estate slump and the damage it might do to the rest of the economy.

The 1.7% decline in the median price of existing homes sold in August was the first year-over-year drop since April 1995, the National Assn. of Realtors said Monday. Also, the number of houses sold fell for a fifth straight month and the supply of unsold homes on the market rose to a record.

The price picture is slightly brighter in Southern California, but home builders, real estate agents and loan brokers here are starting to feel the pain. Los Angeles-based KB Home said last week that new-home orders on the West Coast plunged 58% in the three months ended Aug. 31 compared with a year earlier. Countrywide Financial Corp. of Calabasas, the nation's biggest mortgage lender, warned workers last week to brace for layoffs.

"Things are clearly turning down pretty hard" for residential real estate, said Jan Hatzius, an economist at investment firm Goldman, Sachs & Co. in New York. "You're going to have some payback from this" in the economy overall, he said.

Just how much payback is in store -- and how consumer spending may be affected by the downturn -- is a matter of growing debate among economists.

Many analysts believe that the economy is strong enough to avoid falling into recession even if housing continues to weaken. "You have to be careful not to exaggerate how much [housing] dampens the economy given that everything else other than the auto sector is doing well," Federal Reserve Bank of Dallas President Richard Fisher said after a speech Monday.

But the real estate boom of the last decade has been unprecedented in size and scope, which raises the risk that the downside also could exceed forecasters' best guesses, said Eric Belsky, executive director of Harvard University's Joint Center for Housing Studies.

After any boom, "there's a tendency to predict a more gradual unwinding than actually occurs," he said.

Housing's troubles pose two main threats: one to millions of jobs directly dependent on the business, the other to homeowners' willingness and ability to spend if they feel poorer because of the trend in property prices.

About 10 million jobs are tied directly to residential real estate, from construction workers to escrow agents to the clerks at the local hardware store, Goldman Sachs estimates. That's about 7% of total U.S. employment. Some analysts believe the total is closer to 10%.

Soaring job growth in construction, real estate sales, mortgage lending and related businesses helped buoy otherwise anemic employment gains from 2001 to 2004 as companies hired to meet the spectacular appetite for homes.

Some housing-related businesses already have begun to jettison workers. Calabasas-based builder Ryland Group Inc. says it has cut its workforce by 10% this year nationwide to 3,000.

"Everyone is tightening their belts," said Irene Genders, president of the California Escrow Assn. "We're expecting this to be a little while."

Still, employment cuts overall have been modest, at least as measured by government payroll data, which don't pick up freelance workers. Payroll jobs in residential construction totaled 3.31 million in August, off just fractionally from the 3.33 million at the start of the year, Labor Department data show.

Andy Perkins, San Diego branch manager for Orco Construction Supply, said he believed that job losses were just beginning as housing projects finish up and builders find little or no new demand.

More construction equipment is coming back to his stores rather than moving to another job, Perkins said. "San Diego has set the trend for the business falling off the shelf" in single-family homes, he said.

Goldman Sachs estimates that the housing sector nationwide could shed 1.5 million to 2 million jobs over the next several years as the industry retrenches. The result could be to reduce total U.S. employment growth to a monthly average of 100,000 jobs in 2007, from an average of 150,000 a month over the last three years, the firm said.

Direct employment in real-estate-related industries is just part of the equation when measuring the sector's influence on the economy. There also is the so-called wealth effect that housing prices have on consumers' spending.

Rocketing home prices over the last decade provided many Americans with an income windfall, either from the outright sales of houses at a profit or from mortgage refinancings or credit lines that allowed homeowners to cash in some of their accumulated equity.

A study coauthored by then-Federal Reserve Chairman Alan Greenspan last year estimated that mortgage-equity withdrawals tied to surging real estate values added $600 billion to consumers' disposable income in 2004 alone, making up about 7% of the total that year.

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