Hous­ing won’t trig­ger re­ces­sion

The Washington Times Weekly - - Commentary - Don­ald Lam­bro

Pes­simism is a con­ta­gious af­flic­tion, born by fears of a cat­a­clysmic re­sult that is based on lit­tle or no com­pelling ev­i­dence — usu­ally in the face of a pile of facts to the con­trary.

That’s the ill­ness that spread through Wall Street two weeks ago, trig­gered by the con­tin­u­ing tur­bu­lence in the hous­ing and credit mar­kets amid fears the sit­u­a­tion will only worsen and drag the rest of the econ­omy down with it.

Some of the gloomi­est traders on Wall Street have be­gun, once again, to talk about a re­ces­sion, the dreaded r-word that rears its ugly head when­ever the stock mar­kets go through their usual cor­rec­tions — which is what’s hap­pen­ing now.

Cooler heads ad­vise that, for the time be­ing, the hous­ing trou­bles have not spilled into the econ­omy at large. That’s be­cause the fall in home sales and the con­cur­rent col­lapse of the subprime-mort­gage mar­ket rep­re­sents a small frac­tion of our $13 tril­lion-per-year econ­omy.

This is not to say the credit crunch can’t get worse. The tor­rid hous­ing boom of the last sev­eral years led to a frenzy of ir­re­spon­si­ble mort­gage schemes of­fer­ing lit­tle- or no-in­ter­est or no-down-pay­ment deals and short-term ad­justable-rate mort­gages to poor credit risks.

Thus far, an es­ti­mated 20 per­cent to 30 per­cent of them have fallen through, and that could go higher when in­ter­est-pay­ment re­sets kick in over the next two to three years. The im­plo­sion of th­ese types of loans has dried up the money flow to lenders, forc­ing the Fed­eral Re­serve Board to pro­vide ad­di­tional liq­uid­ity to the bank­ing sys­tem dur­ing this rough patch.

But this still begs the ques­tion: Does the hous­ing credit crunch en­dan­ger the larger econ­omy? The ev­i­dence sug­gests it does not. In­deed, there’s a moun­tain of ev­i­dence that the econ­omy is stronger, de­spite the tem­po­rary hous­ing ill­ness. A few ex­am­ples:

The econ­omy, in the mid­dle of the subprime mess, grew by a strong 3.4 per­cent in the sec­ond April-June quar­ter, driven by stronger con­sumer de­mand, in­creased ex­ports and an uptick in man­u­fac­tur­ing out­put.

Em­ploy­ment con­tin­ues ris- ing, with the job­less rate now at a low 4.6 per­cent. More Amer­i­cans are work­ing than at any time in our his­tory. Wage growth has re­bounded.

A large de­cline in gaso­line prices last month helped hold con­sumer prices to their low­est in eight months. Prices rose a mere 0.1 per­cent in July, and the core rate of in­fla­tion, ex­clud­ing volatile en­ergy and food, has risen a tame 0.2 per­cent for the last two months.

The big news from a key sec­tor of the econ­omy: The Fed re­ported in­dus­trial out­put rose 0.3 per­cent last month, fol­low­ing a solid 0.6 per­cent rise in June. July’s in­crease was fu­eled by a 0.6 per­cent rise in man­u­fac­tur­ing, the sec­ond con­sec­u­tive in­crease at this rate.

“An­a­lysts be­lieve U.S. facto- ries, af­ter be­ing hit by a slow­down late last year, are start­ing to re­vive the econ­omy in spite of con­tin­ued trou­bles in the hous­ing sec­tor,” As­so­ci­ated Press eco­nomics writer Martin Crutsinger re­ported two weeks ago. Stronger global growth is a big fac­tor be­hind the faster fac­tory out­put. We are sell­ing more abroad, which, the gov­ern­ment re­ported this month, has been driv­ing down the trade deficit.

An­other sign of the econ­omy’s health is the re­port two weeks ago that the bud­get deficit is fall­ing faster than ex­pected. Tax rev­enues have been flow­ing into the Trea­sury at higher-thanfore­cast lev­els as a re­sult of grow­ing em­ploy­ment and ris­ing cor­po­rate earn­ings.

There’s even a bit of hope that the hous­ing sec­tor’s sales de­cline may be primed for an up­turn, ac­cord­ing to a re­port from the Na­tional As­so­ci­a­tion of Real­tors.

“Al­though home prices are rel­a­tively flat, more metro ar­eas are show­ing price gains with gen­eral im­prove­ment since bot­tom­ing out in the fourth quar­ter of 2006,” said NAR se­nior econ­o­mist Lawrence Yun. “Re­cent dis­rup­tions will hold back sales tem­po­rar­ily, but the fun­da­men­tal mo­men­tum clearly sug­gests sta­bi­liz­ing price trends in many lo­cal mar­kets.“

No­tably, the NAR sur­vey found hous­ing price in­creases in 97 of 149 cities it sur­veyed, or about two-thirds of the mar­ket. In other words, the bot­tom is not fall­ing out of the hous­ing mar­ket.

The un­der­ly­ing re­al­ity in the hous­ing mar­ket is that most home­own­ers have ex­pe­ri­enced “very healthy long-term gains,” said NAR Pres­i­dent Pat Combs.

So, Wall Street pes­simists not­with­stand­ing, the U.S. econ­omy is sturdy, re­silient and grow­ing. Over the long term, I don’t think the hous­ing down­turn will fun­da­men­tally af­fect that trend.

Don­ald Lam­bro, chief po­lit­i­cal correspondent of The Wash­ing­ton Times, is a na­tion­ally syn­di­cated colum­nist.

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