Housing Market Drives Fear

There continues to be bad news for homeowners, and there are no signs of a pending turnaround. Data was just released that showed that the sale of new homes fell by a record in 2007, characterized by weak prices and a buildup in unsold homes. For both sellers and homebuilders, it remains a nightmare.

On Monday, the Commerce Department reported that the sales of new homes sank by a whopping 26.4% in 2007 to its worst year on record. The previous worst was a 23.1% decline in 1980, when the housing market was in crisis due to a slowdown.

The news impacted the financial stocks, especially those with a large exposure to mortgages and subprime mortgages. The concern is that the housing crisis could drive a recession. The Federal Reserve has already cut interest rates by 75 basis points at an emergency meeting, and it could cut rates further at Wednesday’s FOMC meeting.

The soft housing markets are impacting wealth and consumer spending in what is called the “poverty effect.” When housing prices decline, homeowners believe that they are poorer than they actually are, and they spend less, which impacts the economy. Lower prices translate into less material wealth, and this negatively impacts the way that homeowners spend, especially in regard to bigger-ticket items.

As we move forward, we expect to hear about more impacts that are driven by the fragile state of the subprime market and increased credit concerns in the banking system.

My feeling is that the ripple effect from the housing market may continue to spread into 2008 unless we see some stability in the credit and housing markets. For those who are looking to buy, prices have come down in some of the pricier regions across America.

Clearly, the credit and housing markets are not improving and could get worse. Foreclosures are at record highs across the nation, and homeowners are beginning to get scared, as evidenced by the declining consumer confidence sentiment.