Bigger hit expected from housing market woes

For Sale by Owner sign

KAI RYSSDAL: In a way, you almost wish the market gods would let us have it once and for all. As it stands, the news about real estate's more like a steady drip drip drip than a single big thing.

And We've been over it with you before. In a nutshell, home-buyers aren't buying, so prices are falling. And the number of houses on the market keeps on rising. Today, some analysts said publicly what others have been thinking. That there's got to be a wider economic impact before the slump is over. Marketplace's Amy Scott takes it from there.


AMY SCOTT: It may seem like all you hear about the housing market these days is doom and gloom. But in a note to clients, strategists at Morgan Stanley suggest people aren't worried enough. They warn that the rise in delinquencies and foreclosures on subprime loans has knocked out the cornerstone of the U.S. housing market.

Christopher Thornberg is a forecaster with Beacon Economics. He says declining wealth from real estate could slow down the all-important consumer economy. And that could trigger a recession.

CHRISTOPHER THORNBERG: People are realizing their home isn't this unlimited source of new wealth. They now have to get their books back into order, and that implies a big consumer shock.

On Wall Street, homebuilders took a hit after Lennar Corporation said its profits fell 73 percent in the first quarter. Standard and Poors announced its home price index for 10 metropolitan areas hit its lowest level in more than a decade.

Economist Joel Naroff says prices need to drop more. He says many builders have brought their prices down, but owners of existing homes are still holding out for more than they can get.

JOEL NAROFF: I call this the "seller's denial" segment of the housing cycle. Where sellers do see that they're having trouble selling their homes, but they're just not willing to drop the price enough where those homes will actually be bid on.

Subprime buyers helped inflate home prices. With access to cheap loans, borrowers could buy at prices they otherwise couldn't afford. With those buyers out of the picture, Naroff says affordability is much more important.

In New York, I'm Amy Scott for Marketplace.

RYSSDAL: The chairman of the Federal Reserve might have something to say about all the housing news tomorrow. Ben Bernanke's scheduled for some quality time with the congressional Joint Economic Committee mid-morning.

About the author

Amy Scott is Marketplace’s education correspondent covering the K-12 and higher education beats, as well as general business and economic stories.

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