U.S. Housing Laying Foundation For A Recession?

After such a strong performance by the markets in 2006, investors are wondering if next year will hold much of the same. But there are concerns that a continuing decline in housing and the weakening U.S. dollar could lead to a recession. Gary Shilling is one such pessimist. He was on “Morning Call” saying there’s a 75% chance the economy will dip in 2007.

According to Shilling, there’s always a lag of about a year to a year and a half between falling home sales and price declines. Sellers attached to their homes fail to see the reality of the market. Expect prices to “go off the cliff” in the next six months, “and that will really hurt the economy,” he says.

Robert Heller, a former U.S. Federal Reserve governor, is predicting a softer landing. He also appeared on “Morning Call,” along with CNBC’s Steve Liesman. New homes sales are growing, Heller says, consumers are confident, and corporate profits are good. “I see no reason why housing should fall off that cliff,” he says.

Liesman says the debate has changed in recent months from soft landing versus hard landing to soft versus no landing. Recent data has been on the upside, and consumers are stronger. “It appears as if housing is bottoming out,” he says.

Shillings reply: “The route to a housing collapse, like the route to true love, is never a straight line.” New home sales may be up, but it’s only because they’re being given away – much like consumer electronics were this season. Sales may be up – but profits are not.

Heller says the next data point that will have the greatest effect on the economy is unemployment. It has been low, but an uptick could leave consumers less optimistic.