Vital Signs: Deeper Damage from Housing?

On tap: January readings on new and existing home sales, home prices, personal spending and income, and durable goods orders

by James Mehring

The potential economic fallout from housing may be far from over. That’s bad news for the economy at large. Once widely viewed as a well contained problem, economists are now worried that housing could stimulate a wide range of damage to the economy through 2008.

Among those concerned about the ongoing collapse in housing are officials at the Federal Reserve. In the minutes from its Jan 29-30 monetary policy meeting, Fed members thought housing was “one of the major sources of downside risk to the economic outlook.” That comes on top of new economic growth projections that revised down the 2008 outlook to growth in real gross domestic product to a paltry 1.3% to 2%.

Analysts will get a pretty complete update on the state of the housing market this week. There's widespread belief that purchases of new and existing homes suffered very small declines in January. However, there's a good chance that sales have more room to fall. With credit markets still in turmoil, many banks tightening their lending standards, and mortgage rates ticking back up, it will be harder for people to get mortgages.

What’s more, home prices are losing altitude fast. Both the monthly S&P;/Case Shiller Home Price Index and quarterly numbers from the Office of Federal Housing Enterprise Oversight (OFHEO) are likely to show further erosion in home values. Falling prices tend to keep potential buyers on the sideline. That’s especially bad news for home builders who are stuck with nearly 500,000 unsold homes, or about 10 months worth of demand.

The Fed is anxious that the ongoing weakness in housing will crimp hiring and restrain wage growth. Lower home values and bad mortgages would also ding consumer balance sheets. The combination could push consumers to rein in their spending.

If consumers do stay at home, it will likely impact business behavior as well. Executives could turn more cautious and limit investments in new computers and other equipment. Indeed, it's expected that durable goods orders in January dropped.

The implosion of the housing boom was once viewed as a very isolated, albeit significant, economic event. That’s no longer the case. Instead, Wall Street and Main Street will be fretting about the economy and a possible recession for a while to come.

Here’s the latest weekly economic calendar, from Action Economics.