American Housing Slump May Shave 1% Off GDP
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
American housing sales are declining at a greater-than-expected pace that will shave one percentage point off economic growth in the second half of 2006, Freddie Mac said in a forecast this week.
Sales of new and existing homes probably will total 6.76 million this year, a drop of 9.4% from 2005’s record 7.46 million transactions, the McLean, Virginia-based mortgage buyer said. Freddie Mac, the second-largest mortgage company in the world, a month ago predicted a sales slump of 7.9%.
“The weakness in housing is slashing economic growth,” Freddie Mac Chief Economist Frank Nothaft said in an interview. The Federal Reserve said in August the housing sector’s “cooling” is weakening the economy as it ended a series of 17 consecutive increases in its overnight lending rate. Home sales and ancillary purchases such as new furnishings and renovations account for as much as 23% of GDP, according to the Joint Center for Housing Studies at Harvard University in Cambridge.
Freddie Mac’s new forecast echoes comments made last week by Federal Reserve Chairman Ben S. Bernanke. The housing slump will lop about a percentage point off economic growth in the second half of 2006 and restrain expansion next year, Bernanke said during an October 4th speech to the Economic Club of Washington.
“There is currently a substantial correction going on in the housing market,” Mr. Bernanke said, answering questions after his speech.The decline in residential housing construction is one of the “major drags that is causing the economy to slow.”
Housing sales probably will continue to tumble until the first half of 2008 and result in a 27% cumulative drop, the chief economist at National City Corp. in Cleveland, Richard DeKaser, said. That would surpass the 25% decline seen in the 1986 to 1991 housing slump, he said.”We are still early in the game,” Mr. DeKaser said. “We’re only about halfway down.”
This year, the housing slump will cause GDP to average 2.3% in the third and fourth quarters, down from the 3.3% it would have been without a decline in home sales, Mr. Nothaft said in today’s forecast. In 2005, when housing sales reached an all-time high, economic growth averaged 3% in the final two quarters of the year, he said.
Measured annually, the economy likely will grow at a 3.2% pace in 2006.
