HOUSING WEIGHS ON THE ECONOMY / THE NEW YORK TIMES EDITORIAL ( VERY HIGHLY RECOMMENDED READING )

November 28, 2009

Editorial

Housing Weighs on the Economy

All roads into and out of the recession run through the housing market. During the summer, that road seemed to be heading toward recovery. These days, it seems to be headed back toward hard times. A reversal would have big implications for the economy and, by extension, the policies now being pursued by the administration, Congress and the Federal Reserve.

The Commerce Department reported this month that new-home construction fell sharply in October. That led many economists to reduce their estimates for economic growth in the current quarter.

Even this month’s other seemingly good news had a dark lining. Reports from industry and government showed that sales of both new and existing homes rose in October. But much of that was driven by buyers who rushed to claim the first-time home buyer’s tax credit before it expires on Nov. 30.

Though the credit has since been extended, it is not expected to spur many more sales anytime soon, in part because many buyers who would have been in the market in 2010 bought in advance of the first expiration date. The mini-frenzy of buying also did not prop up prices much, as a glut of homes on the market has depressed home prices over all. By conservative estimates, prices are now expected to fall by another 10 percent next year, bringing the average decline nationwide to 40 percent.

A weakening housing market in a fragile economy is a recipe for pain. Already, nearly a third of homeowners with a mortgage — 15.7 million people — owe more on their mortgages than their homes are worth, according to Moody’s Economy.com. Negative equity combined with high unemployment greatly increases the risk of delinquencies and foreclosures, which, not surprisingly, continue to hit new highs.

A question for policy makers is, if real estate is not going to lead the way out of recession, what will? A related issue is where best to aim government resources as the hard times endure. The extension of the home buyer’s tax credit, which failed in its first go-round to spark lasting improvements, was a giveaway to the real estate industry. Relief and recovery efforts that are focused on job creation more directly, rather than on favored industries, are needed.

The administration must also be prepared to alter its anti-foreclosure effort if, as expected, foreclosures surge again in 2010. And the Federal Reserve, whose interventions have sustained the housing market over the past year, must show flexibility. The Fed has made it clear that it would prefer to begin withdrawing support for the market in the months ahead. But without other strong and successful fiscal measures in place, that could do more harm than good.

Copyright 2009 The New York Times Company