Economist: U.S. home-price drop could lead to recession

Monday, Sept. 19, 2005 | 11:23 a.m.

Home prices in some U.S. regions are so inflated that if the so-called real estate bubble bursts, the economy could fall into recession, Standard & Poor's chief economist David Wyss said.

The 10 U.S. areas with the most overvalued real estate are Nassau and Suffolk Counties on Long Island and New York City, New York; Miami, West Palm Beach and Fort Lauderdale, Fla.; San Diego, Los Angeles and Orange County, Calif.; Providence, R.I.; and Cape May, N.J., Wyss said in the report.

It would take a 30 percent decline in prices nationally and a 50 percent drop in new-home starts to push the economy into recession, Wyss said. Using the late 1970s and late 1980s as a guide, it's more likely that price growth nationwide will slow rather than reverse, the credit-rating company economist said.

"It's hard to escape the conclusion that prices in most of the top-10 metro areas are too high, and that, sooner or later, they will drop," Wyss said.

Prices in those regions would have to fall at least 35 percent to come in line with income, he said. Nationally, the average home is selling for 3.1 times the average household income, compared with 2.6 times during the past 45 years, Wyss said.

Getting New York City home prices back to their 1989 to 1998 average of 5.3 times income would require a drop of 39 percent, Wyss said. He said price growth probably will stop accelerating and stabilize until incomes catch up with "unsustainably high" mortgage debt.

"The coming rebalancing period could last half a decade, because it will take a 20 percent correction nationally to restore the normal ratio of home prices to incomes," Wyss said.