Housing Downturn Hammers the Economy

Fallout from the decline in home building drags growth down.

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In Tuesday's S&P/Case-Shiller report, we learned that home prices are dropping at a clip that's even faster than expected.

Today, we got a better picture of just how damaging the housing bust has been to the overall economy. It ain't pretty.

While the first-quarter estimate of real growth in gross domestic product came in better than expected—at a 0.6 percent annual rate—the housing market was once again a piano on the economy's back.

"The largest drag on real GDP continues to be home building, which subtracted 1.2 points from the real GDP growth rate," Brian Wesbury, chief economist at First Trust Portfolios, said in a report.

Were it not for housing, real GDP growth would have been 1.8 percent, Wesbury said. Overall, investment in housing dropped at a nearly 27 percent clip. Ouch.

David Resler, chief economist at Nomura Securities, puts it into historical context:

The impact of housing on the economy was virtually the same as it was in the first quarter. Those were the two worst quarters in 25 years.... Housing is certainly the leading edge of this downturn and continuing to be the deepest and most troubled segment of the economy.

So then, David Resler, will the residential housing sector continue to be this much of a drag on the economy?

I think it will be less of a drag. But unfortunately, other sectors will be more of a drag. The non-residential construction industry has now joined the residential industry in recession. It was down in the quarter [and] that's probably not an aberration. It's probably the beginning of a trend. Although I don't think the declines are going to be steep—it won't be as severe as the housing correction, but it's going to persist for a while.