Housing a "Drag" on the U.S. Economy - and May Spur Another Rate Cut

By Jason Simpkins
Associate Editor

The U.S. economy is showing new signs of weakness, stemming from losses in the housing sector. And that's despite a 4.9% third-quarter surge.

Foreclosures increased while home-values plummeted - a trend many experts see continuing well into 2008.

New home prices have dropped the most since 1970, and foreclosure filings have nearly doubled from a year ago. While new home sales increased 1.7% to 728,000, the Office of Federal Housing Enterprise Oversight said new home prices dropped 0.4%. That's the first decline since 1994. The Commerce Department reported the median price for a new home dropped 13% to $218,000 in October.

Also, more than 50,000 homes were lost to foreclosure in October.  A total of 224,451 foreclosure filings were reported, up 94% from a year ago, according to statistics from RealtyTrac.  53,609 homeowners were forced out of homes repossessed by banks, up 158% from 20,768 a year ago. At total of 309,557 homes have been repossessed by banks leading to forced evictions this year. RealtyTrac expects 2 million homes to have entered into the foreclosure process by year's end. 

 "Some people are in over their heads, owing more than what they can sell their house for," RealtyTrac spokesman Daren Blomquist told CNN. Blomquist thinks foreclosures could hit homeowners even harder in the beginning of 2008, as many adjustable rate mortgages (ARMs) reset at higher monthly payments.

"The other side of the vise pressing on these people is that it's harder to refinance because lenders' standards are tighter," Blomquist added.

Many analysts have interpreted weakness in the housing sector as a positive signal, as it increases the chances of the Federal Reserve cutting its key interest rate next month.

Fed Vice Chairman Donald Kohn indicated a rate cut could be on the horizon saying Wednesday, "The housing sector has continued to decline and to erode at a very, very rapid rate. It would be nice to see some early signs that it was beginning to stabilize, and we haven't seen that yet."

Stocks, which looked sluggish at the day's open, rebounded on the increased likelihood of a rate cut at the Fed's next meeting on Dec. 11.

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