Vital Signs: Housing Drag Won't Let Up

On tap: September figures on home sales and durable goods, October consumer sentiment, and more earnings reports

by James Mehring

How low can housing go? Early this year it appeared as if conditions were settling down, but the situation has changed dramatically in the past six months. Indeed, its drag on the economy shows few signs of letting up. According to Federal Reserve Chairman Ben Bernanke in a speech on Oct. 15, "the further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year."

This week, the September figures for both new and existing homes are released, and the consensus view is that conditions kept deteriorating. Falling sales has led to a ballooning level of unsold homes on the market. In August, there were over eight months worth of unsold new homes available and 10 months worth of existing homes up for sale.

This building supply of homes will force home prices to keep falling and drive builders to rein in building activity even further. Making matters worse is that falling home prices could keep potential buyers on the sideline as they patiently wait for better deals, thus completing what is shaping up to be a vicious cycle in housing.

Conditions in the credit market, touched off by bad subprime mortgages, are also making it tougher for those who would like to buy a home. Credit standards have been raised and mortgage rates are above levels seen before the credit market turmoil.

A big concern among Fed officials and Wall Street economists is that the ongoing contraction in the residential market will erode consumer confidence and spending. While the popular gauges of confidence haven't tracked very well with actual spending of late, they do provide some measure of apprehension. After all, people aren't just dealing with a housing recession, but also elevated energy costs heading into winter, a softer job market, and the increased uncertainty over the health of the U.S. economy.

Here's the weekly economic calendar, from Action Economics.