Thursday, December 28, 2006

Formula to check out

Check out this simple formula: take the dollar value of new and existing single-family homes in 2005 and divide it by the nation's gross domestic product, the total of all goods and services produced in one year. That gives you a ratio of 16.3 percent.

"That's off the scale," Kasriel said. "The ratio has never been that high. The median is 8.4 percent and the previous high, of less than 12 percent, was in the late 1970s."

Real estate prices have been dropping faster than ever before. The National Association of Realtors said last month that the median price in October for existing homes fell to $221,000 nationally, down a steep 3.5 percent from October 2005.

"That's the largest decline on record since 1968, and the speed of the decline has been breathtaking," Kasriel said. "It's just like a straight line down."

"About $800 billion in equity was taken out of the housing sector by consumers in 2005. This year I expect it'll be about $500 billion, and in 2007 it'll be between $200 (billion) and $300 billion," he predicted.

As housing-related cash dries up, so does the overall economy. Baker terms it "a significant drop" in economic liquidity.

"If we go into recession, it'll be because of housing."


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