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Housing may sabotage an economic recovery

Since the tax credit deadline passed at the end of April, housing has faltered. Economic headwinds — job insecurity, tight credit and consumer confidence — appear to be too much to overcome..
Since the tax credit deadline passed at the end of April, housing has faltered. Economic headwinds — job insecurity, tight credit and consumer confidence — appear to be too much to overcome..

WASHINGTON — Housing led the United States out of seven of the past eight recessions. This time, it might kill the recovery.

Home sales collapsed after a federal tax credit for buyers expired in April. Since then, the manufacturing-led expansion, which began in the second half of 2009, has been waning, with jobless claims rising and factory orders falling.

"If foreclosures continue to mount and depress home prices, that could send the economy back into a recession," said Celia Chen, an economist who tracks the industry for Moody's Analytics. "The housing market and the broader economy are closely intertwined."

Spending on home construction and items such as furniture and stoves accounted for about 15 percent of gross domestic product in the second quarter, according to West Chester, Pa.-based Moody's Analytics. Real estate also can influence consumer spending indirectly. When values soared in the mid-2000s, people used the boost in equity to pay for cars and vacations. After prices fell, homeowners lost that cushion and curbed spending.

A report Tuesday by the Chicago-based National Association of Realtors will show July sales of existing homes plummeted 12.9 percent from June, the biggest monthly loss of 2010, according to the median estimate of economists surveyed by Bloomberg.

New-home sales, which account for less than a 10th of housing transactions, stayed at the second-lowest level on record last month, economists predict Commerce Department data will show Wednesday.

"Housing continues to be stuck in the doldrums," said Jeffrey Frankel, a member of the business-cycle dating committee at the National Bureau of Economic Research, the arbiter of when recessions begin and end, and a professor at Harvard University.

With 14.6 million Americans out of work, homeowners are struggling to hold onto their properties. One in seven mortgages were delinquent or in foreclosure during the first quarter, the highest in records dating to 1979, according to the Washington-based Mortgage Bankers Association..

Home prices tumbled 33 percent from their July 2006 peak to the low in April 2009, according to the SP/Case-Shiller 20-city index. They may drop another 20 percent by 2012 if the economy slips back into a recession, according to Chen, the Moody's Analytics economist.

Home construction and property sales led the way out of the previous seven recessions going back to 1960, according to PMI Group Inc., a mortgage insurer in Walnut Creek, Calif. New-home sales improved an average of eight months before the beginning of economic growth, and single-family housing starts improved seven months before recovery.

That didn't happen in the last recession. Sales of new houses fell in five of the eight months before economic expansion began in 2009's second half. Housing starts fell in two of seven months.

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