Housing decline to drag economy: The weakness in the housing market is deepening

Ha-choo

The weakness in the housing market is deepening, with home sales dropping in recent weeks and mortgage applications plunging, in what analysts expect to become a drag on the economy.

The booming housing market has driven a third to a half of the growth in jobs and economic activity in recent years, economists estimate, but that bonanza is slowly coming to an end.

The housing market is coming "off the boil," said Paul McCulley, managing director at Pimco bond funds. "The world will feel the impact, not just American homeowners."

Mr. McCulley expects a sharp decline in housing next year to undermine consumer spending and cause a "serious slowdown" in the economy, although not a recession.

Just last week, the Fed and other federal regulators directed banks to limit their offering of exotic instruments such as interest-only loans, which have the low monthly payments that many buyers have needed to afford purchasing houses at today's record high prices.

Zoltan Pozsar, analyst with Moody's Economy.com, said the exotic loans extended the life of the housing boom for two years, but the banking directive curbing their use should "work as a potent supplement to higher interest rates" to rein in housing.