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Recession seen as just a matter of time

An economist says a further drop in home prices would be a blow to consumers' psyche.

WASHINGTON - U.S. home prices have fallen more since mid 2006 than during the 1990-91 recession and professional traders bet they'll plunge up to 10 percent more the next year.

If the speculative traders making big-money bets on where housing prices are headed are right, the question is not whether a U.S. recession is ahead, but when it will start.

Sizable drops in home prices in a year would likely curtail consumer spending sharply. Yale University economist Robert Shiller, who has long warned of inflated home prices, says a big hit to U.S. housing assets, worth about $23-trillion, would shock the broader economy.

"It will upset balance sheets, it will upset lots of our economic institutions," said Shiller, who argues that prices were driven higher by greed, not people looking to buy a place to live. Adjusting for inflation, housing prices have soared 86 percent in the past decade, although some cities, such as New York, Los Angeles and Washington, saw far larger jumps than most regions of the country.

Yet homeowners across the nation tapping into credit lines pegged to the value of their houses has been a potent economic driver in recent years. For the vast majority of U.S. households, the home is the most substantial financial asset they hold. If its value plummets, so does their sense of prosperity, which can restrict spending on everything from vacations to cars and eating out or buying new clothes.

Home prices fell less than 3 percent during the economic downturn of the early 1990s and rose through the 2001 recession, but have dropped 3.2 percent over the past year, according to a closely watched housing market index created by Shiller.

Signs of the housing market fallout are easy to find. Employers cut jobs in August for the first time in four years. Especially hard hit: home builders and mortgage lending companies.

The slowdown is extending to major retailers, including Target and Lowe's, which have trimmed profit expectations for the year as consumer spending wanes.

Recession fears are on the rise. Dean Baker, co-director of the Center for Economic and Policy Research in Washington, warns of a severe downturn as the housing market continues to unravel.

Baker says he is bracing for the worst recession since World War II. In a bubble market, buyers don't need to focus on whether an asset is overpriced, he said. In a weakened economy, "the psychology is broken," Baker said.

Not everyone sees a gloomy outlook.

The NAR industry trade group, which had been criticized by economists and bloggers for its sunny predictions during the boom times, remains optimistic.

The group's senior economist, Lawrence Yun, projects home sales will stabilize after modest gains early next year.

[Last modified September 26, 2007, 23:51:47]