Will housing slowdown put brakes on the economy?

Chris Farrell

TEXT OF INTERVIEW

SCOTT JAGOW: This morning, we'll get the latest numbers on new home sales. I think I'll go out on a limb and say they'll be slower. Existing home sales came out Tuesday. They were down for the eighth time in 10 months. Shares of the major homebuilding companies on the New York Stock Exchange have dropped 46 percent in the last year and a half. So we have glaring signs the housing market is well into its slowdown. Our Economics Correspondent Chris Farrell says the debate about this is shifting.

CHRIS FARRELL: I think it's shifted to yes, the market has slowed down. Does that mean a slowdown in the market or recession for the US economy?

JAGOW: Well, Chris I'm going to put you on the spot right now because I want to go back to what you said on December 29, 2005 about this particular topic:

FARRELL tape: So the no-brainer forecast for 2006: Prices are going to come down a little bit, a lot of people are going to pull their homes off the market. Our homes are no longer going to be ATM machines, we're not going to be borrowing, but it's not going to be enough to take the economy into recession. That's going to take something else.

JAGOW: OK so how do you feel about that now?

FARRELL: I still agree, we can stop right now. I absolutely agree. Housing market has slowed down, you house is not going to be an ATM machine, but there is no disaster in the making. This is not the mother of all bubbles that is going to burst and just take the economy down.

JAGOW: But there are some economists who do believe that this is going to drag down the economy, what are you basing your prediction on?

FARRELL: There was a very good story in the New York Times last week looking at the adjustable rate mortgage market. And one of the big surprises has been, you know, adjustable rate mortgages, this was the really risky side of the market, this was people really stretching to buy. And about $400 million in adjustable rate mortgages are resetting this year, about $1 trillion next year. So that's when the market was going to collapse and yet there's been very little distress in the market. And you know what, people aren't that dumb. I mean what they're doing is they're refinancing or it turns out you know the increase in their mortgage is just not that much. So one of the things I think is happening is that the mortgage market is just not as disastrous as everyone had forecast.

JAGOW: Where does this bottom out?

FARRELL: I think this bottoms out several years from now. So I expect prices will go down. I expect they will go down significantly over a long period of time, perhaps somewhere in the range of 8 percent over a period of several years. That's not a collapse, but it's going to have a genuine impact on the housing market and the pocketbook of the American homeowner.

JAGOW: And if you are an American homeowner, what do you do with this information?

FARRELL: There's all kinds of advice on the Internet, actually some pretty good advice, about how to make your place sellable in a tough market. A little bit of landscaping, a little bit of painting, things that don't cost you that much money but make your place presentable. So we're going back to that whole era. And if you're a buyer, be aggressive, don't overpay. Get what you want.

JAGOW: That sounds pretty good. Alright Chris, thanks a lot.

FARRELL: Thank you.

JAGOW: Chris Farrell is the Marketplace Economics Correspondent. In Los Angeles, I'm Scott Jagow. Thanks for joining us and have a great day.

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