2007 March 17 Saturday
Subprime Mortgage Problems Portend Deeper Housing Downturn

A deep enough demand drop to bring on a recesssion?

Most economic forecasters in a new WSJ.com survey believe recent turmoil in the subprime mortgage market is likely to spread to the broader mortgage market and they expect a widely followed index of home prices to fall this year. But they still think the U.S. will avoid a recession and even a significant rise in unemployment.

Serious question: which sectors of the US economy can grow? Can any export industries grow enough to exert a substantial positive influence? At some point the US economy's growth is going to become export led. The US dollar can't stay strong against Asian currencies forever.

I think the majority are right that the subprime mortgage problem will influence the regular mortgage market. Some of those subprime buyers are buying from financially stronger sellers who are selling to buy another house but with a higher quality mortgage.

Of the 60 economists surveyed, 32 said it is either "very" or "somewhat" likely that the intense and speedy unraveling of the market for subprime mortgages -- home loans made to people with poor credit histories will spill over to the rest of the mortgage market.

But 26 said that's not likely. Two didn't respond.

These economists put the odds of a recession in the next 12 months at only 25%.

They put the odds of recession in the next 12 months at about 25%, slightly less than former Federal Reserve Chairman Alan Greenspan's odds of about 33%.

But interest rates on shorter and longer term bonds suggest at least a 50:50 chance of a recession this year.

The bankruptcies of many sub-prime lenders and the general tightening of lending requirements by the remaining lenders means fewer people getting the money to buy and less demand for new and existing housing. Plus, less money will flow into "flip this house" remodelling. So the total demand for housing construction workers and materials will drop.

Share |      By Randall Parker at 2007 March 17 04:54 PM  Economics Housing

John S Bolton said at March 18, 2007 1:31 AM:

A significant part of the market for existing houses is gone; but as you move up the price-scale the part of the purchase price financed with mortgages of any kind, gets smaller and smaller.
In spite of this, large and populous areas with million dollar+ average house prices have had 15% price declines over the last year or so.
The economy often peaks months or years after the top of the building cycle.
The exception to that is the sudden 'credit crunch' which could be like what is underway now.
The past credit crunches were related to inflation and regulatory limits on interest rates, though, in the last few decades at least.
The current situation has started with price declines, and revelations of preposterously weak
credit and fraudulent activities, more like a securities bubble.
In the nature of the case, it can't be fast-moving in its unwinding, though, unlike stock bubbles.

Ned said at March 20, 2007 6:09 AM:

Before we start hanging too much crepe, let's put this in perspective. The Federal Reserve puts the volume of the subprime mortgage market at about $300 billion, which is not a small number, but still constitutes only 7-8% of the total home mortgage market. A $300 billion loss is not enough, by itself, to cause a recession. For comparison, the total corporate equity that was gobbled up by the burst of the tech bubble was about $9 trillion. Now that's enough to cause a recession. So is a recession possible? Of course - who knows what the economy is going to be like a year from now? But it's going to take a lot more than the crash of the subprime mortgage market to do it.

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