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Weak housing market weighs on job growth

Since the middle of last year, an ongoing downturn in the U.S. housing market has taken a toll on homebuilders, condo flippers, borrowers, lenders, and just about anyone with a home for sale. Now, it’s hitting yet another target: the jobs of everyone who works in housing-related industries. By’s John W. Schoen

Since the middle of last year, a downturn in the U.S. housing market has taken its toll on a wide group of people and companies, clobbering homebuilders, condo flippers, borrowers with weak credit, lenders who oversold loans, and just about anyone with a home for sale.

Now the housing slump is hitting yet another target: housing-related jobs, a list that includes everyone from the people who build and sell houses to makers of appliances and furnishings.

That's a sharp contrast to the height of the housing boom in 2005-06, when the industry was responsible for creating some 25,000 to 50,000 new jobs every month, according to Mark Zandi, chief economist at

“In the recent months it’s been laying off workers at a pace of 25,000 to 50,000 per month,” he said. “And I think the next couple of quarters we’ll start seeing job losses of between 50,000 and 75,000 per month. ... I think the housing market is going down a whole other notch.”

With the global stock market on edge and analysts debating the odds of recession, the government’s monthly jobs data due out Friday will be scrutinized more closely than ever for hints of what lies ahead. 

Housing-related job losses once again put a dent in February job growth, which saw an overall gain of 97,000 — down from a gain of 111,000 in January. Employment in housing-related industries fell by 11,000 in February, bringing to 176,000 the total number of jobs lost in the sector since at sector since April 2006, according to figures compiled by

Greenspan the oddsmaker
The odds are still against the economy slipping off the growth track it’s been on since the last recession in 2001, according to most economists. Former Fed Chairman Alan Greenspan, whose once-opaque statements have turned crystal clear in retirement, this week pegged the odds of recession at one in three. A survey of private economists last month pegged the odds at roughly one in four, according to Randell Moore, editor of Blue Chip Economic Indicators.

Regardless of what the experts think, consumers are showing signs of turning gloomy. A Wall Street Journal/NBC News poll released Wednesday showed that 31 percent of Americans expect the economy to get worse over the next year, compared with just 16 percent who felt that way two months ago.

To be sure, there’s still plenty of good news and positive data indicating that the economy remains on track. Consumer spending is holding up well, fueled by fairly strong wage gains. Despite the Federal Reserve’s public hand-wringing about price increases, inflation is fairly tame by historical standards. And while the U.S. economy appears to be slowing, the global economy remains relatively strong. Worldwide gross domestic product should grow by 5 percent this year and 5.2 percent in 2008, according to Kathleen Stephansen, head of global economics at Credit Suisse.

But the news from the front lines of the homebuilding industry remains gloomy. Sales of new homes plunged 17 percent in January, the latest monthly figures available. On Wednesday, D.R. Horton, the nation’s largest homebuilder, said it would take until January 2008 for the industry to work through a glut of unsold homes. Company CEO Don Tomnitz summed up the outlook by bluntly saying that 2007 “is going to suck.”

It’s not yet clear just how bad 2007 will be. The stock market’s recent gyrations have been fueled in part by growing concerns about wider economic damage from continued housing industry weakness and the rising number of defaults by borrowers at the low end of the credit scale, the so-called “subprime” mortgage market.

Concerns about the subprime market picked up this week after one of the biggest lenders, New Century, said last Friday its books were being investigated the Securities and Exchange Commission and the U.S. Attorney for the Central District of California. The news sparked a huge sell-off Monday in the stocks of lenders that are active in the market.

New Century's problems began last month when it said it needed to revise losses it had already reported. It also said that because of accounting mistakes, it underestimated how badly its loans were performing. Other subprime lenders have reported big losses and a jump in loan defaults. Regulators have issued new guidelines calling for tighter lending practices.

The recent rise in defaults follows a period of easy money that many observers say simply got out of hand, with speculators buying multiple homes they had no intention of occupying and lenders handing out mortgages to people who couldn't afford to repay them. Some trace the  spree to excess cash in the global money system from a variety of causes — from the Federal Reserve's aggressive rate-cutting early this decade to the piles of dollars being recycled by a booming economy in China and other emerging markets.

Sloshing liquidity
"Just as the case often was back in college, when you have too much liquidity sloshing around for too long, people tend to do some foolish things," Wachovia senior economist Mark Vitner wrote in a recent research note. "Apparently that includes loaning money to folks with spotty credit histories to purchase homes not only to live in but also to speculate on."

The resulting defaults are now hurting both lenders who ignored credit risks and the borrowers who couldn't afford their loans. But the relatively small losses reported so far could be part of a larger problem. That’s because the modern mortgage market is backed by billions of dollars of related securities — pools of mortgages that lenders sell to big investment brokerages, who chop them up into smaller chunks, sell them to investors and pocket a fee.

The advantage of this arrangement is that the risk of any one loan defaulting is spread among many investors. And as lenders sell off existing mortgages, the proceeds from those sales provide more money to lend to new home buyers.

The problem is that no one knows just who is holding this paper — or how much is concentrated in one place. Though regulators have relatively good data on the financial risks borne by banks and mortgage companies, an unregulated investor like a hedge fund could be sitting on a pile of shaky securities that represent future loan defaults.

“One of the reasons why this is as scary as it is that the market is completely opaque,” said Zandi.

Meanwhile, the collapse of subprime lending is putting further pressure on housing prices because it’s taken a large segment of the home-buying public out of the market. About a third of last year's new home buyers would be rejected for a loan today, according to Zandi.

“What’s going on in subprime market right now means that there will be a smaller pool of people than can be qualified for mortgages going forward,” said Moore.

And with fewer potential buyers out house-hunting, the slide in homes sales will be tougher to turn around.

Meanwhile, all those homes bought by borrowers who got in trouble — and are now defaulting on their loans — are being put back on the market. That increase in new inventory, especially when offered at fire-sale prices, puts added pressure on the price of houses already listed for sale.

“Most lenders want to get rid of this problem as fast as they can,” said Zandi. “They’re not going to fool around. They’re going to put the foreclosed properties up for sale at a discount to move the properties. And that’s going to put another weight on the fragile market.”

It’s also not clear what impact the subprime meltdown will have on the wider mortgage market. Though there are some signs that credit problems have spread beyond subprime borrowers, those problems, so far, are seen as manageable by credit analysts. But the fear is that if the situation gets worse, the result could be the kind of real estate downturn that brought on the recession of 1990-91.

One widely watched canary in the coal mine for predicting recessions is the bond market, which places minute-by-minute bets on whether inflation or recession is the bigger threat. Investors placing those bets have a choice between locking up their cash in short-term notes for a few months or buying long-term bonds that won’t pay back their principal for years. Usually, they get a little more interest on long-term bonds to make up for the risk of tying up their cash.

But today, short-term rates are higher than long-term rates. Economists call that a so-called “inverted yield curve” — and it’s the steepest upside-down graph since 2000, just before the U.S. economy last slid into recession. According to a formula developed by Federal Reserve economist Jonathan Wright, the yield curve is currently flashing recession odds of about 50-50. But some analysts say the heavy demand for Treasury bonds is distorting the formula’s recessionary signal.

“It could be sending a false signal — or at least a partial false,” said Moore.

Further weakness in the economy — especially if it shows up in monthly jobs numbers — could prompt the Federal Reserve to begin cutting short-term rates after keeping them steady since last June.

“I think the Fed is going to lower rates probably sometime this summer, because I think the  unemployment rate is going to continue to tick up,” said David Wyss, chief economist for Standard and Poor’s.