Housing Starts, Permits Sag
Schumer Warns 'Worst Is Still Yet to Come'

By Nancy Trejos
Washington Post Staff Writer
Thursday, September 20, 2007

Housing starts fell to their lowest level in 12 years last month, while permits for new construction also declined, pointing to a further weakening of an already battered housing market.

Those numbers, as well as a report showing that builder confidence is at a record low, prompted Sen. Charles E. Schumer (D-N.Y.), chairman of the Joint Economic Committee, to declare during a hearing yesterday that the "worst is still yet to come." The number of foreclosures has jumped in some parts of the country, as interest rates increase on adjustable-rate mortgages made to risky borrowers during the now long-over housing boom.

Lawmakers and economists warned that problems in the subprime mortgage market could drag down the entire economy, despite the Federal Reserve's decision Tuesday to cut a key interest rate to decrease borrowing costs.

"For the first time in years, the 'R word' -- recession -- is being discussed far and wide as a real possibility," Schumer said.

Robert J. Shiller, an economics professor at Yale University known for his study of investment bubbles, submitted written testimony saying that "the collapse of home prices might turn out to be the most severe since the Great Depression."

If home prices continue to fall, he said during the hearing, the probability of a recession happening in the next year would be more than 50 percent.

Peter R. Orszag, director of the Congressional Budget Office, gave a slightly more positive outlook.

"The best available evidence suggests that while the housing slowdown will slow the economy and the risk of recession is elevated, the most likely scenario is continued economic growth," Orszag said.

The Commerce Department's report, meanwhile, showed that housing starts in August fell 2.6 percent from the previous month to a seasonally adjusted annual rate of 1.33 million units. That was 19.1 percent below the level of a year earlier.

The number of housing permits authorized, a barometer of future activity, fell 5.9 percent in August from the month before to a seasonally adjusted annual rate of 1.31 million. That was 24.5 percent below the level a year ago.

In addition, home-builder confidence declined in September for the seventh consecutive month, tying the record low set in January 1991, according to an index from the National Association of Home Builders and Wells Fargo released this week.

Patrick Newport, an economist with Global Insight, a Lexington, Mass., forecasting firm, said the two sets of numbers, coupled with a National Association of Realtors report earlier this month that its index of pending home sales fell by 12.2 percent in July compared with the previous month, point to a bleak future.

"You have these three leading indicators that are pointing to really bad upcoming housing numbers," he said. The housing starts data "was a pretty bad report, but I think we better get used to it because we'll see a series of bad reports coming up for the rest of the year."

David Seiders, chief economist for the National Association of Home Builders, predicted home prices will continue to slide in some parts of the country as foreclosures dump more houses on the market and lenders tighten standards.

"Demand will still be on the weak side," he said. "Inventory is still high. . . . That's the prescription for downward pressure on prices."