Does A Housing Market Downturn Lead To Recession?

Over the holidays and in meetings early in 2007, everyone has been cautiously watching the current downturn in the housing market as a lead indicator of a recession in the U.S. economy.

One method used to gauge housing activity is the number of building permits issued. In the 1991 recession these permits dropped below 1.0 million annually. Since 1955, a recession has occurred more than 85% of the time when housing permits were down more than 15% from the high for more than 12 months.

In 1980 and 1991 the permits were down more than 45% for more than 12 months, and both instances led to a steep recession. The exception was in 1963 when building permits were down 15% for 16 months with no economic downturn.

How Bad Is It This Time?
Currently building permits are down 29% for 16 months. The U.S. economic growth has slowed from about 4% annually to approximately 2%. Long-term interest rates have remained steady because of foreign governments’ appetite for financing U.S. bonds and debt. As long as this continues, then the housing sector will continue to slowly let air out of the housing bubble. Anything to disrupt rates at this time in a negative fashion could accelerate the decline and create a steep recession in the U.S. and abroad.

Last year, refinances of housing with easy credit contributed over $600 billion to a $12 trillion economy. Much of the economy was driven by consumer spending. The housing market factor will be closely watched in this column for the remainder or 2007.

Management Tip of the Week:

Have you prepared your will? Forty-seven percent of American farmers and ranchers have not.

Editor’s note: Dave Kohl, The Corn And Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.