the US is experiencing its worst housing recession since the Great Depression, and the slump is not over. Construction of new homes has fallen about 50%, while new home sales are down more than 60%, creating a supply glut that is driving prices down sharply – 10% so far and probably another 10% this year and in 2009.
Already, $2.2 trillion of wealth has been wiped out, and about eight million households have negative equity: their homes’ are worth less than their mortgages. By 2010, the fall in home prices will be close to 30% with $6.6 trillion of home equity destroyed and 21 million households – 40% of the 51 million with a mortgage – facing negative equity. If owners walk away from their homes, credit losses could be $1 trillion or more, wiping out most of the US financial system’s capital and leading to a systemic banking crisis.
unsecured consumer credit (credit cards, auto loans, student loans)
While a global recession will be averted, a severe growth slowdown will not. Many European economies are already slowing, with some entering recession. China and Asia are particularly vulnerable, given their trade links to the US. And emerging markets will suffer once the US contraction and global slowdown undermines commodity prices.
Nouriel Roubini is Professor of Economics at New York University and Chairman of RGE Monitor (www.rgemonitor.com).
Copyright: Project Syndicate, 2008.
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