Housing Drop: More Bad News for the Economy

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The new homes market is looking more and more barren (Photo: Chris Keane/REUTERS)

It might be time to bring back the home buyer tax credit.

On Wednesday, a day after the National Association of Realtors said sales of existing homes dropped 2.2% in October, the Census Bureau said that new home sales had dropped a full 80% below their peak. Just 23,000 new homes were sold last month. That was the worst October for housing sales on record. The previous low was set 29 years ago in October 1981, when 29,000 homes were sold. In 2005, 105,000 houses sold in October of that year, or more than 4 times the number sold last month.

So how big a drag will housing be on the economy in 2011? Potentially a big one. Here’s why:

The construction industry, which is driven by new home sales, has been a major source of unemployment in the current recession. For a sense at how bad the industry has been hit consider this: While the construction industry typically employs about 5% of all workers, it currently makes up about 10% of all those who are now unemployed. In October, 1.4 million construction workers were without jobs. What’s more, the unemployment rate among construction workers was the highest by far of any industry the Bureau of Labor Statistics tracks. The unemployment rate among construction worker is 17.3%. Leisure and hospitality, the industry with the next highest, has an unemployment rate of 11.1%. And that’s just the out of work people who used to build the houses. There are also realtors and mortgage brokers and title company employees that are out of work or out of a lot of work not that fewer houses are selling.

But what may be more important is that housing is not just a source of employment, it’s also a big driver of spending. First of all, unemployment in the construction industry is likely to have a bigger drag on spending than say layoffs on Wall Street. Construction workers are not as likely to have severance or as large savings as higher paid workers that could allow them to maintain consumption even after they lose their jobs.

Second, it wasn’t only sales that dropped in the housing market. Home prices took a big hit as well. The average price of a new home dropped nearly 14% in October from the month before. Yes, that’s 14% in one month. Remember when they used to say housing prices never drop. In October, the average new home sold for $194,400. The last time that average was below $200,000 was back in December 2003. It’s like the housing boom never happened.

While the lower prices is a boon for those buying right now, it’s also another drag on consumption. Even if one is not thinking of selling, studies show that lower house prices cause homeowners to spend less. We feel poorer. And when new homes fall in price it makes it harder for the rest of us to sell our homes.

And here’s where we get to the case of reinstating the home buyer tax-credit. The real estate slump, if it continues in 2011 as it is looking more likely it will, will remain a big drag on the economy. You can say a lot of bad things about the home buyer tax credit, which allowed people who bought a house to deduct $8,000 from their taxes. But fact is it worked. Home sales and prices went up. Yes, it pulled prices forward and may be the reason we are slumping now, but that is the point of stimulus to pull sales forward from the future until the economy catches up.

What’s more, unlike most other forms of stimulus spending. A re-up of the home buyer tax credit is probably something that could pass the newly divided Congress. Republicans like tax cuts. And the real estate and home building lobby is a powerful one especially with Republicans. And both would really like to see the tax credit come back.

What’s more, a new survey from Fannie Mae survey showed the number of people who said it was a good time to buy a home dropped to 68%. That was down 2% from the month before. But it still suggests that there are a fair number of people who would buy a house, given a push.

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