Housing: What Will Cause the Next Depression?

01-15-2011 • finance.yahoo.com

"Home prices are starting to sag again under the crushing weight of foreclosed properties," said Sal Guatieri, senior economist and vice president at BMO Capital Markets, an economic research group. "A sharp drop in prices would undermine household wealth and confidence, and reverse the recent pickup in consumer spending. It would also fuel the vicious cycle of delinquencies and tight credit standards." [See Why Homeownership Can Still Pay Off] Moreover, if 10 million more homes are still to be foreclosed on, this could hurt state and local economies, which are already on thin ice. "Foreclosures will drive down values, which in turn will drive down local tax revenues (real estate taxes) affecting local government services," said Mark Lieberman, a private economic consultant and former senior economist for Fox Business Network. "State and local governments will have to shrink payrolls" as a result. Oil Prices While the housing market may be the leading contender for triggering the next recession, it's far from the only risk the economy faces. Several economists also expressed concerns that rising oil prices could stall our road to recovery. "In the short run, the risk is from the oil sector. If oil prices top $125 [per barrel] and stay there for about three months, then the economy will have a mild recession," said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University. "Consumer spending will take a hit, followed by the capital spending plans of businesses, which will be cut back, leading to a recession."