How A Recession In Housing Affects The Rest Of The Economy

Watch CNBC for 5 minutes and 30 seconds and you can get a good sense of the attention being paid to the day-to-day developments in the housing and mortgage markets. At this point it is no secret (or real surprise) that the housing industry is in a recession. We have increasing inventory, slowing sales, and decreasing prices. The construction unemployment rates are rising. The mortgage industry is facing a fairly turbulent adjustment with several companies collapsing on short-notice, and leaving several consumers left waiting for the money to buy their homes.

But most agree that these adjustments are good for the industry's long-term benefit. This is typical of the market cycle. Its just that the other side of the cycle carried the industry so far for so long, that this side feels more intense.

Paul Kasriel of Northern Trust highlights some of the ways in which the housing industry's growing pains can spill over into the greater economy:

"The tentacles of the housing recession are reaching beyond consumer spending. Freight haulers, both truck and rail, are reporting weaker volume growth because of the decline in residential construction activity. With fewer housing developments popping up in suburbia, newspaper advertising revenues are being adversely affected. And the producers of construction equipment, such as Caterpillar, are experiencing softer domestic sales."

It will be interesting to watch this develop. And of particular interest will be to monitor the role of the Federal Reserve, who is attempting to tread a fine line between averting a significant economic recession and giving the market participants false confidence through bail-out gestures.