Smith Faculty Opinion Article	October 24, 2007
By Dr. Peter Morici, Professor of International Business E-MAIL WEB SITE

Existing Home Sales, Prices Fall Again:
Deepening Subprime Crisis Threatens Recession

Today, the National Association of Realtors reported existing home sales were 5.040 million in September, down from 5.480 million in August and 6.230 million a year ago. My forecast was 5.1 million and the consensus prediction was 5.2 million.

Even more troubling the median price fell to 211,700 in September from 224,400 in August and 229,220 in June, when the scope of the subprime crisis was largely unknown.

Clearly, the absence of financing for home buyers with less than stellar credit records and the shortage of jumbo financing for prime loans above $417,000 is griping the housing market and driving prices down. This is best illustrated by the fact that home prices are falling more rapidly on the pricey West Coast than in the economically troubled industrial Middle West.

Third quarter GDP data and September personal consumption data to be released next week will show consumers and surging exports held up the economy and delivered about 3 percent third quarter GDP growth. However, the data will also show that in September consumption, like business spending, waned from August, and the economy is slowing into second gear.

The economy will likely grow at 1.5 to 2 percent or less in the fourth quarter.

Until the Federal government takes affirmative steps to rebuild the mortgage and bond markets with meaningful reforms, home prices will continue weak, and the economy will remain at risk.

Tipping from 1.5 percent growth into recession is easily done. It takes no more than sneeze from the Middle East or some kind of currency crisis.

Already, CEOs are expressing skepticism, and further erosions in home prices could cause as stampede of pessimism among both business executives and consumers that the Bush Administration and the Federal Reserve could not easily arrest.

Look for preemptive action from the Federal Reserve next week, and for Bernanke to cut interest rates.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.