by Calculated Risk on 5/28/2005 11:35:00 PM

Earlier, on Angry Bear, I tried to quantify the impacts of a housing slowdown on the general economy (See: After the Housing Boom: Impact on the Economy). This NYTimes article asks the same question:

"[W]ould a real estate crash really matter to the country as a whole?

In a word, yes. To understand why, first look at how pervasive the effects of real estate are throughout the economy."

Then the article does an excellent job of discussing some of the impacts of declining prices: declining wealth effect, end of equity withdrawal, and much more ...

"But that's not all. The housing sector has even broader effects on the economy, by some estimates accounting for 25 percent of all activity. A decline in property values would most likely lead to declines in other industries, like construction, brokerage, banking and insurance. And these are important for future growth. Construction, for example, amounts to 4 percent to 5 percent of the economy, according to the Bureau of Economic Analysis.

Then there's banking. Because of the leverage associated with real estate, a fall in values would affect banks and other lenders. It would probably lead to tightened credit standards, less lending and higher interest rates. If lenders begin to suffer steep losses, there is always the danger of financial contagion, in which problems at one institution ripple out to others it does business with.

And there's a new wild card for the economy. In 2004, adjustable-rate mortgages made up a third of new mortgage originations. No one knows what the effect of the widespread use of A.R.M.'s would be in a down market. A climb in interest rates, of course, would put downward pressure on real estate prices, but A.R.M. borrowers would feel the pinch rapidly. If those borrowers started to default, lenders would be hurt."

For these reasons I'm concerned about the impact of the coming housing bust on the general economy.