Housing Market Key to Economic Recovery

The fate of the lagging U.S. economy is in the hands of the housing market, according to some analysts. The market’s ability to recover over the next few months is likely to determine whether the economy begins to improve or sinks into the deepest recession since the early 1980’s. The prevailing belief among economists is that in order for the housing market to recover there needs to be around a 10 percent drop in prices to lure in more buyers.

"Another 10 percent down would put prices back consistent with rents and incomes. That's a signal that housing affordability has been restored for most potential home buyers," Mark Zandi, chief economist at Moody’s Economy.com said. However, if credit standards continue to tighten even a 10 percent drop in prices may not be enough to allow the market to rebound.

"The tightening in the supply of mortgage credit is probably the last major obstacle standing in the way of a sales stabilization," Citigroup economist Steven Wieting said.

Another factor economists are watching very closely is interest rates. If interest rates were to rise to 7.5 percent, housing prices could plummet by up to as much as 24 percent. The effects of such a sharp decline in prices is a potential disaster as it could conceivably wipe out home equity for millions of homeowners. With little to no personal savings - which is currently at a low not seen since the Great Depression - and no equity left in their homes consumer spending would assuredly sink, along with the entire U.S. economy.

Source Reuters:

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