Could the downturn in housing itself trigger an economic recession?

Mostly because it is accompanied by other factors. Namely, relatively high short term interest rates and relatively high gas prices. These factors are causing falling wages, in real terms, negative saving rates, increasing debt service levels and falling confidence. All of which will led to a significant reduced consumption according to Dr. Roubini. Reduced consumption, in the aggregate, will trigger a recession.

If this scenario comes to pass, then all bets are off regarding a sustained flat housing market.

He believes that the flattening of home price appreciation and increasing debt service levels reduces the withdraw of equity from homes. Many with adjustable rate mortgages (ARM's) will be unable to refinance their homes in the current interest rate environment. Thus, causing credit to tighten due to increasing defaults and foreclosures. The foreclosures will further pressure home prices and the tighter credit will discourage even those with sufficient equity in their homes from borrowing against it. Thus, even those in no danger of losing their homes will slow their consumption because they will be unable to access the equity in their homes.

It is this drop in consumption that triggers a broader recession. The broader recession with the associated loss of jobs will deepen the consumer lead pullback. People who lose their jobs in a recession have a greater chance of losing their homes than those who don't loss their job. This puts downward pressure on housing prices.

So aggregate demand trends may be just as important as employment trends in determining where the housing market is headed.

Today, demand numbers were released. Not so good. While the headline number was a reasonable 2.9%, the report showed that inventories are building. Companies react to building inventories by cutting production. That means reduced hiring, less overtime, and in some cases outright layoffs. Regardless of the trigger for this slowdown, the parallel and substantial slowdown in housing, will make the situation worse.