From the Wall Street Journal:
The decline in U.S. home prices accelerated in the fourth quarter, according to two leading barometers, compounding two of the biggest threats facing the nation’s economy: faltering consumer spending and tight credit markets.
The S&P/Case-Shiller national home-price index for the fourth quarter fell 8.9% from a year earlier, the largest drop in its 20 years of data. And the Office of Federal Housing Enterprise Oversight’s index — which tracks only homes purchased with mortgages guaranteed by home-loan giants Fannie Mae or Freddie Mac — was down 0.3%, the first year-to-year decline in the measure’s 16 years.
Lower home prices threaten the economy’s growth by making consumers feel less wealthy and thus less willing to spend. They also curtail homeowners’ ability to borrow against the value of their homes to finance other purchases. In addition, lower housing prices erode the value of banks’ collateral, prompting them to tighten their lending standards, which further damps economic growth.
A top Federal Reserve official indicated the housing slump and its broadening impact on the economy probably would keep the central bank biased in favor of more interest-rate cuts. “It appears that the correction in the housing market has further to go,” Fed Vice Chairman Donald Kohn said yesterday in a speech in North Carolina. Mr. Kohn said that the downturn, after being “contained” for nearly two years, “appears to have spread to other sectors of the economy.” He added that if the housing market deteriorates more than expected, “lenders might further reduce credit availability.”
The Fed’s efforts so far to soften the blow of the housing slump with lower interest rates appear to be having a muted effect. Since September, the Fed has reduced its target for short-term interest rates by 2.25 percentage points to 3%. But some mortgage rates are actually rising, and those that are falling haven’t fallen that much.