Monday, January 02, 2006

Housing decline to drag economy

The weakness in the housing market is deepening, with home sales dropping in recent weeks and mortgage applications plunging, in what analysts expect to become a drag on the economy.
The booming housing market has driven a third to a half of the growth in jobs and economic activity in recent years, economists estimate, but that bonanza is slowly coming to an end.
The housing market is coming "off the boil," said Paul McCulley, managing director at Pimco bond funds. "The world will feel the impact, not just American homeowners."
American consumers, bolstered by more than $5 trillion in new wealth since 2000 generated by the rising value of their homes, have been propping up not only the U.S. but the world economy, he said.
Mr. McCulley expects a sharp decline in housing next year to undermine consumer spending and cause a "serious slowdown" in the economy, although not a recession.
So far, the decline in housing has unfolded gradually. Sales of existing homes dropped for a second straight month in November, and the median price of homes has stagnated around $215,000 nationwide since peaking at $220,000 in August, the National Association of Realtors reported yesterday.
Mortgage applications are at the lowest levels since 2002, while new home sales took a record dive last month. The average price of a new house has declined for three straight months, and the inventory of new houses for sale is at record levels.
Home prices are still higher than they were last year, but the apparent peak in housing this summer is bad news for consumers, who have been enjoying an unprecedented increase in purchasing power thanks to year after year of double-digit gains in home values.


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