Housing hurting economy but recession not likely, economist says

Date published: 10/10/2007

BY BILL FREEHLING

RICHMOND--A strong and growing global economy should prevent a recession in the U.S., despite weaknesses in domestic housing, a top economist said yesterday.

"Businesses have all the financial firepower they need to expand," economist Mark Zandi said in a speech at the Greater Richmond Convention Center.

Zandi is chief economist and co-founder of Moody's Economy.com. His remarks came in front of about 800 people at the 17th annual Virginia Commonwealth University Real Estate Trends Conference.

Although he doesn't anticipate a recession, Zandi expects the U.S. economy will struggle in the short-term due to falling home prices and tight credit.

Zandi noted that the residential-mortgage market still has about $2.5 trillion worth of outstanding debt in subprime and other risky loans. About half of that is at serious risk for default as adjustable rate loans reset.

Lenders are tightening credit standards, meaning fewer people can get home loans. That's causing the number of homes on the market to rise. Zandi said there are just two ways to reduce inventory: cut construction of new homes or lower housing prices.

About 300,000 people have already lost their jobs in housing-related industries, Zandi said. He expects about a million more job losses in that sector. Coupled with a dearth of home-equity credit, these factors could lead to a drop in consumer spending.

Zandi said housing problems are serious, but the economy is diverse enough to withstand it as long as other industries add jobs. If not, a recession could loom.

"It's reasonable to be concerned about the possibility of a recession," Zandi said.

He's optimistic that won't happen because most corporations remain highly profitable and flush with cash. As the credit turmoil eases, Zandi thinks companies will regain confidence and grow.

Strength in the global economy is also helping the U.S. with international trade, Zandi said. A weak dollar makes U.S. products more affordable and appealing to other countries. Cities and industries involved in foreign trade should prosper.

Finally, Zandi noted, federal policymakers have responded to the credit crunch by lowering interest rates and expanding government loan programs.

Zandi tailored some of his remarks specifically around Virginia. He said the state's economy has held up well, and only the Washington area has experienced large housing-price drops.

He said the state's low taxes and reasonable costs for energy, labor and rent are business-friendly. He said Virginia needs to invest more in education so a higher percentage of the workforce would be college-educated.

Date published: 10/10/2007