The Outlook for Housing With Mark Zandi of Moodyseconomy.com & Robert Brusca of Fact & Opinion Economics
Monday, September 25, 2006SUSIE GHARIB: Joining us with more analysis on the outlook, Mark Zandi, chief economist of moodyseconomy.com and Robert Brusca, chief economist of fact and opinion economics. Good evening, gentlemen. Nice to you have on the program.
ROBERT BRUSCA, CHIEF ECONOMIST, FACT AND OPINION ECONOMICS: Good evening.
GHARIB: Mark, let me begin with you. How serious are the declines that we have been seeing in the housing market?
MARK ZANDI, CHIEF ECONOMIST, MOODY`S ECONOMY.COM: They`re serious. Home sales are down 15 percent, single family construction about the same and now we`re seeing price declines. The market peaked about a year ago, and I think it has another year run, the decline.
GHARIB: How about you, Bob? I know that you don`t see it that way. Tell us why.
BRUSCA: The housing market is weak and it`s weak on a broad front, but I really don`t think that we have to worry that much because this is the tail and the tail doesn`t wag the dog. I think the economy is going to do all right. I don`t think housing prices are going to go down a lot. If you look at housing prices are still up some 30 percent over the last three years even with this little decline. So people still have a lot of equity in their homes and I don`t think that`s really a problem.
GHARIB: Well, Bob, some people say that the housing market is in a recession and it could take the whole economy, U.S. economy into a recession. What do you think about that?
BRUSCA: Again, I just don`t think the tail wags the dog. There`s not enough weakness in housing. I`m more concerned about a more classical problem, where the economy makes housing -- the kind of situation we see in Detroit, with all the layoffs adversely affect the housing market there. Having setbacks in places like Nevada and Florida because, irrespective (ph) of excesses -- that`s just part of the way markets work. And I don`t think that there`s enough of that nationwide to worry things. People still have a lot of equity in their homes. The distribution when you look at it - only, basically about 3 percent of the homeowners have less than 5 percent equity in their homes. That`s a very solid amount.
GHARIB: Let me jump in and see what Mark thinks about this. Is the housing market in a recession and could it take the economy into a recession?
ZANDI: It clearly is in a recession, yes. We`re seeing activity decline. Could it push the U.S. economy, broader economy into recession? I doubt it. But clearly, it`s going to weigh on growth. Growth right now is below trend meaning that at this rate of growth, sustained unemployment will start to rise and so it`s going to feel a bit uncomfortable. But under the darkest scenarios, we`ll get recession but only under the darkest ones.
GHARIB: You know, Mark, when the housing market was really surging and booming everybody talked about the wealth effect. People felt very rich because their homes were worth so much money so they felt confident to spend more. What`s the reverse impact of now people feeling less rich and what impact does that have on the economy?
ZANDI: Yes. Consumers are going to grow more cautious as their wealth begins to weaken and house prices fall. That reduces equity for many homeowners and we are going to see them pull back. Most importantly, it`s going to be harder for homeowners to pull cash out of their homes through home equity borrowing or cash out refinancing and so we will see consumer spending growth slow and slow quite measurably.
GHARIB: So, Bob, your view on that. Do you think anything that`s going on in the housing market, these declines could spread into other sectors of the economy?
BRUSCA: Well, sure, housing is important. It`s not just the house; it`s other expenditures people make when they buy a house. There`s usually new carpeting, drapes, furniture things like this. But it`s still true that 60 percent of homeowners have at least 50 percent equity in their homes. So there`s still a lot of equity. It may be diminishing a little bit, but that statistic draws from 2004, which is still several years ago. So when you put that in perspective, this little decline in prices really doesn`t dent consumer equity that much. People at the low end are going to have more problems. That`s always true. But I think the housing market is still a very desirable place to be. We`re going to have some continued weakness, but it`s not going to drag the economy lower.
GHARIB: One Federal Reserve official today said that there`s a serious correction taking place in the housing sector. Does this suggest that the Fed will need to cut interest rates any time soon, Mark?
ZANDI: Well, I don`t think they`re going to cut rates as long as inflation is as high as it is and prospects are that it will accelerate further. But I do think as we make our way into next year, the economy will still be weak, growing below trend and at that point, I do think inflation will be moderate in fact, within the Federal Reserve`s target. So I think the prospects for interest rate cuts say next spring are pretty high and that`s exactly what the bond market is anticipating and I think they`re probably right.
GHARIB: All right, Bob. Interest rate cuts, what do you think?
BRUSCA: Remember, the construction sector is only about -- residential construction only about 5 percent of GDP, construction generally 15 percent of GDP. The Fed is going to make interest rate policy based upon the 95 percent or 85 percent of the economy, not the smaller part of it. So it really has to do with how the economy grows and how those inflation numbers turn out. This little decline we have in oil prices is helpful toward the Fed staying its hand but the Fed really has to watch inflation.
GHARIB: all right. You`ve given us a lot to think about. Thank you gentlemen so much.
ZANDI: Thank you.
GHARIB: We have been speaking with Mark Zandi, chief economist of the moodyseconomy.com and Robert Brusca, chief economist of Fact and Opinion Economics.
