Weak housing market weighs on job growth

Meanwhile, the collapse of subprime lending is putting further pressure on housing prices because it’s taken a large segment of the home-buying public out of the market. About a third of last year's new home buyers would be rejected for a loan today, according to Zandi.

“What’s going on in subprime market right now means that there will be a smaller pool of people than can be qualified for mortgages going forward,” said Moore.

And with fewer potential buyers out house-hunting, the slide in homes sales will be tougher to turn around.

Meanwhile, all those homes bought by borrowers who got in trouble — and are now defaulting on their loans — are being put back on the market. That increase in new inventory, especially when offered at fire-sale prices, puts added pressure on the price of houses already listed for sale.

“Most lenders want to get rid of this problem as fast as they can,” said Zandi. “They’re not going to fool around. They’re going to put the foreclosed properties up for sale at a discount to move the properties. And that’s going to put another weight on the fragile market.”

It’s also not clear what impact the subprime meltdown will have on the wider mortgage market. Though there are some signs that credit problems have spread beyond subprime borrowers, those problems, so far, are seen as manageable by credit analysts. But the fear is that if the situation gets worse, the result could be the kind of real estate downturn that brought on the recession of 1990-91.

One widely watched canary in the coal mine for predicting recessions is the bond market, which places minute-by-minute bets on whether inflation or recession is the bigger threat. Investors placing those bets have a choice between locking up their cash in short-term notes for a few months or buying long-term bonds that won’t pay back their principal for years. Usually, they get a little more interest on long-term bonds to make up for the risk of tying up their cash.

But today, short-term rates are higher than long-term rates. Economists call that a so-called “inverted yield curve” — and it’s the steepest upside-down graph since 2000, just before the U.S. economy last slid into recession. According to a formula developed by Federal Reserve economist Jonathan Wright, the yield curve is currently flashing recession odds of about 50-50. But some analysts say the heavy demand for Treasury bonds is distorting the formula’s recessionary signal.

“It could be sending a false signal — or at least a partial false,” said Moore.

Further weakness in the economy — especially if it shows up in monthly jobs numbers — could prompt the Federal Reserve to begin cutting short-term rates after keeping them steady since last June.

“I think the Fed is going to lower rates probably sometime this summer, because I think the  unemployment rate is going to continue to tick up,” said David Wyss, chief economist for Standard and Poor’s. 

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