Housing Woes May Push U.S. Near Recession: Forecast

Associated Press

Ongoing weakness in the housing market will push the national economy to the brink of recession, but growth in other areas should put the country back on a slow road to recovery by 2009, according to an economic forecast released Wednesday.

The quarterly Anderson Forecast by the University of California at Los Angeles predicts growth in the gross domestic product of just over 1 percent for the fourth quarter of 2007 and first quarter of 2008.

Economic growth will remain "tepid" for the remainder of 2008 and return to 3 percent in 2009, said David Shulman, senior economist for the forecast.

That growth is just above the traditional definition of a recession, i.e., two consecutive quarters of decline in gross domestic product.

"Of course, when the economy slows to a 1 percent pace, it runs the risk of falling into an actual recession, just as when an airplane's velocity dips down to its 'stall speed' and falls out of the sky," Shulman wrote.

The declining housing market could remain at the heart of the nation's economic woes for some time.

Shulman lowered his forecast for housing starts to an annual rate of about 1 million to 1.1 million, down from a range of 1.2 million to 1.3 million.

Bleaker Than NAR

That outlook is less optimistic than one presented Tuesday by the National Association of Realtors, which projected construction of new homes will fall to 1.4 million this year from 1.8 million last year.

Shulman also expects housing prices to plunge 10 percent to 15 percent before they start to recover, sometime in 2009.

"The small recent minimal declines represent not the end, but rather the beginning of what will be a very painful decline," he wrote.

Housing woes have already started to affect consumer spending and are expected to keep doing so through 2008, the forecast said.

Battered Lenders

Auto sales will reach only 15.7 million units in 2008 -- the lowest rate since 1998, Shulman predicted. Housing-related purchases, such as furniture and appliances, were also expected to decline.

Still, strong global demand for U.S.-produced goods and reduced domestic demand for imports should fuel economic growth of about 1.8 percent for 2008, according to the report. Corporate investment in software and equipment was also predicted to fuel modest growth.

Other key factors affecting the economic slowdown could include further credit tightening, which could discourage corporate investment, and the willingness of foreign investors to hold dollar-based assets, the report said.

Homebuilders Weathering the Storm

Shulman expects Congress to pass tough new regulations for the mortgage industry, as a result of rising defaults and the subprime loan market mess.

Congress is also likely to increase the price limit for home mortgages that government-sponsored Fannie Mae and Freddie Mac can buy, he said.

While regulators focus on the role of lenders in the current crisis, little attention will be given to homebuyers, who "got caught up in the real estate mania seeking a quick path to wealth," Shulman wrote.