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Flat big city home prices could cut US GDP-Merrill

*Merrill Lynch says GDP would slow down if home prices stagnate... as if I needed an economist to tell me this... duh...

Flat big city home prices could cut US GDP-Merrill
Mon Jun 20, 2005 12:50 PM ET

WASHINGTON, June 20 (Reuters) - U.S. economic growth could slow by a full percentage point next year if house prices stagnate in the biggest cities, Merrill Lynch said in a research report on Monday.

"What the regional data show, in our opinion, is that these 'local' markets represent a big enough slice of economic activity that should they falter, we could see a fairly hefty impact on aggregate U.S. economic growth," Merrill Lynch economists Sheryl King and Claudia Lokody said in the report.

"In fact, since the U.S. economy has become so dependent on the housing market IV-drip, even if house prices just level off, this could potentially shave GDP growth by almost half a percentage point in 2005 and by more than a full percentage point in 2006," they wrote.

Housing prices have climbed farther and faster than personal income gains in many big U.S. cities. Prices in many cities and metropolitan areas have climbed by double-digit percentages in recent years amid a housing boom fueled by low long-term interest rates.

Merrill said three-quarters of the top 52 U.S. cities are showing signs of overheating, including Miami, New York, Los Angeles and Denver.

A slowdown or leveling off in home price gains in big U.S. cities would not only affect GDP. It would pressure personal spending and residential investment as well, Merrill said. It could lead to a slowdown in the consumption of services and nondurable goods, Merrill said.

It might also boost the savings rate, as households realize they need to save more of their current income rather than tapping into the price appreciation of their homes, the report said.


LINK: http://www.reuters.com/financeNewsArticle.jhtml?type=bondsNews&storyID=8841303