Thursday, September 27, 2007

Can Housing Go into a Recession Without the Economy Falling Too?

New home sales plunged 8.3 percent in August while the average price fell 7.5 percent. New home sales are 21.2 percent below last year. With home building down 19.1 percent from last year, this will only make a bad situation worse.

Will Housing Cause a Recession?

We can have a recession without housing starts plummeting: the recession of 2001 proved that. But can we have a large decline in housing starts without going into a recession?

The chart above is courtesy of the Federal Reserve Bank of St. Louis. Every time we have had a comparable decline in housing starts, the economy has gone into a recession. The lone apparent exception is 1966. And that exception is more apparent than real. The NBER's failure to call the cyclical episode in 1966 a "recession" was extraordinarily controversial and in my opinion a bad call. In 1966, industrial production fell sharply for five months, private domestic spending fell two consecutive quarters, the stock and bond markets took a bloodbath. Housing starts fell by a half.

In the current cyclical environment, housing starts are 41.9 percent below their cyclical peak. That puts the housing sector's current misery right up there with the typical postwar recession.

The odds against our avoiding a recession have shortened dramatically!

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