Housing Price Declines May Set Off U.S. Recession

[Merrill Lynch]

Housing Price Declines May Set Off U.S. Recession, Merrill Says

By Sharon L. Crenson

March 15 (Bloomberg) -- Tighter credit standards among mortgage lenders might lower U.S. home prices by 10 percent this year and push the economy into recession, a Merrill Lynch & Co. analyst said in a report.

New Century Financial Corp., the second-biggest subprime lender and other mortgage companies may fail as the number of customers falling behind on payments rose to a four-year high. More than 20 subprime lenders have closed or sought buyers since the start of 2006 and bank regulators are pushing lenders to raise credit standards.

``Even if the pullback is only aimed at the subprime market, there could well be potentially significant further drags on home prices, construction activity and of course consumer spending growth,'' Merrill's David Rosenberg said in a note to investors.

Declines in home prices would have an effect on everything from furniture and appliance sales to landscaping and the price of copper. That would drive unemployment above 5 percent by the end of the year and the probability of a recession to ``very close to 100 percent'' unless the Federal Reserve cut benchmark interest rates by a full percentage point, Rosenberg said.

``What we are concerned about most are the knock-on effects from the pullback,'' Rosenberg said.
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