Sunday, August 26, 2007

Drop Foreseen in Median Price of U.S. Homes

The median price of American homes is expected to fall this year for the first time since federal housing agencies began keeping statistics in 1950.
Economists say the decline, which could be foreshadowed in a widely followed government price index to be released this week, will probably be modest — from 1 percent to 2 percent — but could continue in 2008 and 2009. Rather than being limited to the once-booming Northeast and California, price declines are also occurring in cities like Chicago, Minneapolis and Houston, where the increases of the last decade were modest by comparison.
Anyone that has read this site knows that I feel we are moving towards recession, it seems some forecasters are also calling for a slowdown:
While the housing slump has already rattled financial markets, it has so far had only a modest effect on consumer spending and economic growth. But forecasters now believe that its impact will lead to a slowdown over the next year or two.

“For most people, this is not a disaster,” said Nigel Gault, an economist with Global Insight, a research firm in Waltham, Mass. “But it’s enough to cause them to pull back.”

In recent years, many families used their homes as a kind of piggy bank, borrowing against their equity and increasing their spending more rapidly than their income was rising. A recent research paper co-written by the vice chairman of the Federal Reserve said that the rise in home prices was the primary reason that consumer borrowing has soared since 2001.
That is exactly what I have been saying. The decline in home prices had led to a decline of what I like to call the "wealth factor". People simply do not feel as financially stable as they did before. It becomes a self fulfilling prophesy. Consumers feel less wealthy and stop spending and that lack of spending results in an economic downturn and a further erosion of home prices. Hang on folks, we are in for a bumpy ride.

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