Housing woes weigh on entire economy

Posted at 8:09 PM, Sep. 9, 2007

Housing woes weigh on entire economy

In my previous entries, I have indicated how commercial real estate and the broader economy could be effected by the slump that began in residential real estate. It is now evident that they are being effected.

Commercial real estate is slowing. Loopnet recently reported that net demand for commercial space has fallen this year. As reported in the LABJ, CB Richard Ellis' stock was effected by a stock analyst's call for the commercial real estate market to weaken. Pete Kendall's Blog carried a report by Hui-yong Yu and David M. Levitt who quoted various sources who felt weakness in commercial real estate.

It now appears that employment is, also, effected. Recent economic reports indicate that jobs fell for the first time in four years, there were downward revision in the previous months data, and a significant fall in the labor participation rate.

Also, please remember, the employed typically do not lose owner occupied residences. Thus, the bleak employment report indicates that foreclosures and pressure on home price will likely remain or worsen in the months ahead.

The last remaining indicator is consumer spending. Thus far it has not materially slowed. If it does, then a serious economic slowdown will be difficult to prevent. This will of course deepen that pressure on home prices. Nouriel Roubini, a professional economist, writes about this in his September 7, 2007 blog entry. He says "And if consumption slows down the build-up of inventories of unsold goods will force firms to slow down production, employment and capital spending. Such investment spending by the corporate sector was already weak in the last few quarters in spite of the high corporate profitability. Now you can expect further weakening of such real investment because of expected lower consumption demand, higher credit spreads for the corporate sector, uncertainty about the future given the volatility in the markets. The sharp re-pricing of risk that took place in the summer – with higher credit spreads for a broad variety of instruments – implies much higher borrowing costs for consumers, buyers of homes, corporations and financial institutions. Thus, the slowdown of private consumption and capital spending in residential, non-residential and corporate investment will get more severe."

We are a long way from a bottom. A bottom is at least 12 months if not 24 months away as most of the ARM resets will occur in the spring of next year and it will take the market at least a quarter to digest them.