As Housing Goes, So Goes the U.S. Economy

For many who didn't know, recent developments have brought home the fact that a robust housing market is key to the overall health of the United States economy. Soft sales activity, falling home prices and rising foreclosures are creating a challenging situation for real estate professionals and local governments, and scary scenarios for homeowners.

Because the housing market is a vital contributor to economic activity, the current housing market contraction has negatively impacted the broader economy. Existing and new home sales fell 12.8% and 26.5%, respectively, in 2007 following sales declines in 2006. Jobs in the residential construction sector have fallen by 291,000 from peak conditions in 2005. As a result the U.S. economy expanded at a sub-par rate of only 2% in 2007. A further weakening in the housing market has the potential to tip the economy into a recession in 2008.

Interestingly, despite the slowdown, the housing sector still contributed nearly $2.1 trillion to the national economy in 2007, accounting for 15 percent of overall economic activity. In addition, commercial real estate, which expanded solidly in 2007, contributed an additional $483 billion to the nation's economy

Despite the decline in the national median home price (it fell 2% last year; the first nationwide decline since the Great Depression), homeownership is still one of, if not the, best investments for accruing personal wealth and assets. A typical homeowner would have accumulated nearly $53,000 in housing equity just over the past five years.

Surprisingly, housing markets in 2/3 of the country continue to show positive gains, and consumer spending has remained resilient, even with high oil prices and uneven consumer confidence.

Of course, the rising delinquency and foreclosure rates have been the lead story on the evening news, and the topic of conversation in every town.

The Mortgage Bankers Association reported that at least 1.3 million home mortgage loans were either seriously delinquent or in foreclosure at the end of the July-September quarter. Private economists are forecasting that the number of foreclosures could soar to 1 million this year and next, about double the 2007 rate.

In response to this crisis, the government and participating banks have joined together in a program they call "Project Lifeline," which was unveiled on February 12, 2008.

The plan, or "bailout" as some refer to it, allows those homeowners who are seriously delinquent in paying their mortgages a 30 day grace period to attempt to work out a payment options with a lender. 

Under the guidelines, homeowners would not qualify for the moratorium if they are already in bankruptcy or if they have a foreclosure sales date less than 30 days away or if the home had been purchased as an investment property or was not occupied at the current time.

The six participating banks are Bank of America Corp., Citigroup Inc., Countrywide Financial Corp., J.P. Morgan Chase and Co., Washington Mutual Inc. and Wells Fargo & Co. They account for 50 percent of the mortgage servicing market.

They are all members of the Hope Now Alliance, an industry group that is trying to coordinate a response to the mortgage crisis. Officials urged homeowners to call the group's toll free hot line number at 1-888-995-HOPE for assistance.

One good bit of news for those ready and able to purchase a home is that both conforming and government-backed FHA and VA mortgages are widely available at historically low interest rates. With the risky subprime lending out of the picture, FHA will become an ever more important factor in helping to revive the housing market. Measurable gains in FHA market share are anticipated in 2008.

Real estate clearly is America's greatest tangible asset, touching millions of people in countless ways. Serving as the pillar of our nation's economy, a recovery in the real estate market will be critical. And, as in the past, the economy will inevitably follow in the direction of the housing market.

Visit there website for further information on Project Lifeline

Gary Mancuso

Oak Park Homes

River Forest Illinois