The housing dilemma...

Housing has been at the center stage of the current economic crisis ever since the sub prime blowup of August. Apart from the fact that pretty much every indicator out there suggests that the real estate market in the U.S. is in a recession, there is growing concern that the worst is still to come and the implications of this on the rest of the economy. The worry is clearly regarding the risk of contagion or a spillover. So far nothing would suggest that the damage is spreading beyond the housing borders but this could very well be because of a lag factor. Studies suggest, for example, that for every 100 dollar drop in financial wealth, the consumer will spend from between 2 to 5 dollars less on consumption. For every 100 dollar drop in housing, on the other hand, consumption drops between 5 and 9 dollars. Apart from the difference in the drop in consumption, it has been shown that the effect of a drop in financial wealth is pretty much immediate, in contrast to a drop in the price of housing in which there tends to be a clear lag (sometimes substantial) before it translates into less consumption. Hence, this could explain why consumption has not retracted despite falling prices. Considering that consumers make up roughly 70% of GDP, this is a very big deal (and unlikely to be offset by exports or a so far resilient stock market).
Considering a stock market that is still in the black for the year and gasoline prices that have yet to reflect the sharp rise in oil, the housing slump on its own wont cause much damage. But if we factor in a possible scenario in which there is a sharp correction in the stock markets, more credit tightening across the board and a sharp rise in gasoline prices (which is bound to occur if oil continues to hover around $100), things could rapidly turn ugly.