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Silver lining? Prices falling sharply

The steeper they drop, the sooner the bottom is hit. But the U.S. may have to lean on other sectors for a recovery.

May 19, 2008|Maura Reynolds | Times Staff Writer

WASHINGTON — Nearly two years into a housing decline that has resulted in hundreds of thousands of foreclosures, frozen credit markets and dragged the nation's economy toward recession, many Americans hope the end is near.

Most economists believe the worst is yet to come.

"I see absolutely no signs of a bottoming, either nationally or in the regions," said Patrick Newport, who tracks the housing market for Global Insight, an economic forecasting firm in Lexington, Mass.

Elsewhere in the economy, some analysts find encouraging signs. Last month's gross domestic product numbers were a bit better than expected, while the consumer price index has risen relatively little since the huge price increases in oil, food and many other commodities that have occurred in recent months. And the financial crisis that paralyzed credit markets may have begun to ease.

If the country is to avoid a full-scale recession, however, as some analysts are beginning to consider possible, the economy is apparently going to have to pull itself back from the brink without help from the housing industry.

"The housing correction is still going to be with us this time next year," said Celia Chen, a housing economist at Moody's in West Chester, Pa.

"The slowdown we've seen in the U.S. economy since late last year appears to be directly linked to the housing crisis and the self-reinforcing cycle of defaults and foreclosures, putting more downward pressure on the housing market and leading to yet more defaults and foreclosures," Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., said in a speech Friday. "We need to find better ways to help struggling homeowners."

When it comes to housing, the optimists are those who see the near free fall in home prices as encouraging: It may at least shorten the economic agony.

"Because the prices are going down so fast, we'll be hitting the stabilization point sooner," said Lawrence Yun, chief economist at the National Assn. of Realtors.

On Friday, the Commerce Department reported that housing construction rose 8.2% in April, the biggest increase in more than two years, but the gain was the result of a surge in new apartment buildings, while single-family home starts kept dropping. Demand for rental units typically rises when homeownership becomes more difficult.

And some analysts think the April gains were an anomaly.

The hard truth is that the housing correction is turning out to be deeper and longer than nearly anyone anticipated. And that's bad news, not just for homeowners and would-be home buyers but for pretty much everyone.

With every month of lower home prices, homeowners see their net worth decline. Potential purchasers are paralyzed by a lack of financing and by the fear that if they buy before the market hits bottom, they will lose money too.

Already, several major retailers tied closely to housing -- furniture chains such as Levitz Furniture and home improvement stores including Home Depot Inc. -- have gone out of business or suffered big losses. Smaller companies are feeling the crunch too.

In Brighton, Colo., Matt Edmundson says his family's wholesale nursery business has declined 30% in the last two years. His primary customers -- once accounting for 75% of sales -- were businesses installing new landscaping for newly built homes and businesses.

"Our largest customer three years ago was doing 8,000 frontyard homes a year," Edmundson said from his office at Arbor Valley Nursery. "Last year they were down to 3,000 and this year to 1,500 -- that's a pretty drastic decrease. We've shifted focus more into the commercial market, but now the whole pie is smaller."

And the damage has not been confined to those closely tied to housing. Economists estimate that the housing downturn has dragged the country's gross domestic product down by about 1 percentage point for the last year.

"It ripples in many ways and in many unexpected ways," said Michael Niemira, chief economist for the International Council of Shopping Centers. "Everybody is touched in some way, whether you are a high-end consumer with an investment in the stock market or someone who is just starting out and wants a loan for a house or a car."

Dean Baker, co-director at the Center for Economic and Policy Research, a left-leaning think tank in Washington, said the correction was taking a huge toll on consumer spending.

"People's ability to spend depends in part on their housing wealth," Baker said. "If we're losing more than $4 trillion in housing wealth in the course of a year, that's over $60,000 per homeowner. That has an enormous impact on consumption."

Economists say consumer spending is the economy's main driver, accounting for about 70% of GDP.

How much longer will home prices fall, and how much further?

In a speech Friday, Treasury Secretary Henry M. Paulson Jr. said the crisis was likely to last into next year.

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