By Chris Cermak, DPA
Washington : It was the dotcom bubble that sparked the last recession in the United States in 2001. This time, it is the housing market fuelling an economic crisis that some believe could be the most severe since World War II.
The picture is daunting: Declining home prices have forced consumers to tighten their belts, rising foreclosures have put investors at risk, creating a ripple effect throughout the economy.
Ironically, the main hope for rescue is in the falling US currency, which has spurred export and tourism.
Many economists and most Americans believe the US has already entered a recession, and even US central bank head Ben Bernanke ventured in early April that a recession was “possible.”
US Treasury Secretary Henry Paulson has repeatedly called housing “by far the biggest downside risk to our economy.”
After climbing rapidly over the past decade, home prices suddenly fell in 2007, fuelling a 75-percent increase in foreclosures by banks.
Owners of subprime mortgages – loans with variable interest rates offered to people with a poor credit history in the over-heated market – were no longer able to refinance or sell homes for a profit when the monthly payments got too large.
The mortgage defaults have driven down prices even more amidst a glut of “for sale” signs.
Construction companies are cutting jobs, banks are clamping down on loans, consumers are borrowing less against their houses to spend at stores.
Among the wider indices of gloom: The private Conference Board said consumer confidence dipped to its lowest level in five years in February.
Economic growth slowed to an annualised rate of 0.6 percent in the fourth quarter of 2007. A variety of indicators from the manufacturing sector added to market turmoil suggest the economy contracted in the first months of 2008. Official figures are expected by late April.
Economists offer increasingly dire forecasts on the state of the world’s largest economy. Bernanke’s predecessor at the Federal Reserve, Alan Greenspan, was among a number of prominent voices suggesting the economic downturn could be the worst since World War II.
Presidential candidates have also weighed in.
Democratic rivals Barack Obama and Hillary Clinton have sharply criticized the Bush administration for focussing more on bailing out Wall Street banks instead of addressing the needs of struggling “Main Street” homeowners.
The one light of hope is the falling dollar. Tourism and exports have been buoyed by the record lows against the Japanese yen and the euro in the past month.
While the US currency’s demise has sparked some calls for intervention elsewhere, economists said the dollar will get much of the credit should the United States avoid a dreaded recession.
Jeffrey Frankel, professor of capital formation and growth at Harvard University, called the falling dollar “the one big bright spot” in an economy otherwise teetering on the brink of prolonged stagnation.
“Exports are providing the one real source of growth in the economy,” Frankel told DPA.
There are some initial signs of recovery, and housing could be one of them.
Sales of existing homes rose unexpectedly in February for the first time in 7 months as some prospective buyers took advantage of bargain prices, according to the National Association of Realtors.
But high petrol and food prices have piled on problems, giving struggling homeowners even more reason to default on mortgages – and cut back on consumer spending that accounts for about two-thirds of US economic activity.
Congressional leaders agreed two weeks ago to a bipartisan bill that would provide tax rebates to homeowners and incentives for prospective buyers to purchase properties in foreclosure.
Paul Bishop, an economist with the National Association of Realtors, believes there may have been a “quicker resolution” to the housing woes if the wider economic slowdown had not been a by-product.
“It’s clear that the stream of foreclosures that we have seen over the last few months is probably going to continue” in the near future, according to Bishop, who said the NAR was not predicting a sustained uptick in the housing market until the middle of 2008 at the earliest.
Harvard’s Frankel is more pessimistic.
“I have never seen any indicators looking this bad,” he warned. “I think the housing market will be the last sector to recover.”