by Calculated Risk on 10/17/2006 09:50:00 PM

From the WSJ Econoblog: How Could the Housing Slump Affect the Nation's Economy?

This is the mainstream view of housing. Here is the most pessimistic view from Celia Chen, director of housing economics for Moody's Economy.com:

[W]e are all in agreement on the contours of the outlook, that the unwinding of the housing market will depress, but not derail, the broader economic expansion. With a record one in 10 jobs now in housing-related industries, the first impact will be on employment. Not only will residential construction employment decline, but industries ranging from mortgage brokers to furniture retailing to interior design and landscaping will take a hit. Indeed, this impact is already evident, with housing-related industries shedding an average of 10,000 jobs a month since March. And the losses will only accelerate as we move into next year.

The negative wealth effect will take a bit longer to kick in, but by next year it too will be a drag on the economy by removing a source of spending power for consumers. While we can, as Chris has, argue about the mechanism by which rising house prices affect consumption, there is no doubt that the increase in home equity has generated a cash cow for homeowners. Even only including active mortgage equity extraction, homeowners were able to extract an annualized $500 billion of additional spending money -- 5% of all disposable income -- in the first half of this year alone. As house price gains dissipate and mortgage credit quality deteriorates, this extraction will fade away, taking a bite out of consumer spending.

Other aspects of the U.S. economy remain quite healthy and will be able to power their way through the housing downturn. Businesses remain flush with financial resources to continue hiring and expanding, and are unlikely to pull back much over the next year. There are numerous downside risks, however, to this fairly sanguine outlook that my co-bloggers have mentioned and that may provide fodder for future forums.

For a really bearish view, see Dr. Roubini's post: With a Dismal Q3, Will US Q4 Growth Rebound Assuring A Soft Landing? Highly Unlikely As Data Suggest Recession Ahead