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Housing market awaits a signal

By Vikas Bajaj

New York Times News Service

Sales of homes are falling, for-sale signs are sprouting across the nation's front lawns and price increases have slowed to a crawl.

No major industry is more sensitive to interest rates than housing. When the Federal Reserve sharply cut short-term interest rates to help the economy recover from the collapse of the technology boom, it added fuel to the national home boom that came afterward. Lately, the Fed has helped dampen it by raising rates 17 consecutive times, a campaign the Fed suspended Tuesday.

Now, as job growth and the economy slow under the twin burdens of higher borrowing costs and rising energy prices, the fate of the housing industry hangs in the balance.

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Will it fall steeply and suddenly, as Wall Street did after the technology bubble burst? Or is housing, as many in the industry like to point out, different enough -- with its patient sellers and real assets on the ground -- to resist powerful downward drafts?

"It won't sound like a stock market crash, because houses don't work like that," said Jan Hatzius, chief economist at Goldman Sachs.

On one hand, he said, housing is unlike the financial markets, because most homeowners hold on to their properties in bear markets. Except for those with powerful reasons to sell, like moving because of a new job or a divorce, many owners are prepared to wait for the market to improve.

On the other, Hatzius expects the correction to be painful anyway, especially along the coasts and in the Southwest, where home prices rose the fastest and the use of exotic mortgages that let people borrow more against their homes was the greatest.

As a result, the return of housing prices to more realistic levels "is going to take a long time," predicted Hatzius.

Many economists, Hatzius included, do not think a housing downturn is likely to push the overall economy into recession. Because of the complexity and diversity of the housing market, which consists of hundreds of local areas with their own peculiar circumstances, it adjusts more slowly than financial markets.

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