Concerns that the current housing crisis could propel the nation into recession have deepened.
Analysts at Deutsche Bank AG say that a 20% decline in housing prices could lead to an all-out recession. That’s because consumer spending could decrease for 6 months or longer – the textbook explanation of a recession. The Federal Reserve Board has said that the typical American spends 3.5 cents of each dollar his or her house increases in value.
The current housing slump – which has lasted two years – represents the worst housing crisis in some 16 years. Experts blame the problem on a number of factors, including excessive building and a drought of speculative buying. Currently, there is 10 months’ worth of unsold homes on the market.
The housing slump has also caused financial institutions to write off nearly $40 billion of their portfolios. An additional $20 billion in losses is expected.
Much of the crisis has been fueled by the frenzy in the subprime loan market. Subprime loans are those home loans that are extended to individuals with shaky credit histories. The subprime debacle has resulted in so many foreclosures that a number of lenders have gotten out of the subprime loan business altogether.
In an effort to restore harmony to the housing market, the Federal Reserve cut interest rates twice in six weeks. So far, though, the rate reductions have not had an appreciable effect on the housing industry. The Fed is scheduled to meet again in December. At that time, a key interest rate could be slashed again, although a number of observers have deemed such a move unlikely.
Housing experts are predicting that the crisis will continue until well into next year. As a result, the housing situation could become a key issue in the 2008 Presidential race. Some members of Congress have been pushing the Bush Administration to take stronger action to combat the housing crisis.
Meanwhile, officials at the Federal Reserve have said they will do everything possible to keep recession at bay. However, some critics wonder if recent Fed moves represent too little action taken too late to prevent a deepening of the current crisis.
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