US housing seen as drag on growth into 2008: Citigroup

A weak housing sector will remain a drag on US economic growth into 2008, given its negative effect on home construction and household wealth, Lewis Alexander, Citigroup's chief economist said on Monday.
The ongoing housing slowdown would keep US GDP growth below trend this year and 2008 at 2.3 percent and 2.6 percent, respectively, according to Citigroup's latest forecast released on Monday.
Alexander forecast that residential construction would fall at an annual rate of 8 percent in the second quarter, 4 percent in the third quarter and 6 percent in the fourth quarter, "We continue to see residential construction being a drag on growth all the way through the end of this year and indeed into next year," Alexander said on a media conference call.
US growth, while expected to lag Japan and the eurozone this year, is expected to surpass both regions in 2008, according to Citigroup. Still, housing remains the wild card that could upset current forecasts. "This is a big source of uncertainty," Alexander said.
Earlier, the National Association of Realtors reported that US existing home sales fell 0.3 percent in May, within market expectations. However, median prices fell 2.1 percent from a year ago and inventory continued to swell.
The recent spike in mortgage rates will likely delay a housing recovery, Alexander said. "The recent increases in mortgage rates have reversed much of the improvement in affordability over the last year," he said.
Last week, Freddie Mac said the average interest rate on 30-year fixed-rate mortgages was 6.69 percent, down from 6.74 percent in the prior week but up from 6.37 percent a month ago. Moreover, further downdraft in home prices could squeeze consumer spending, which accounts for two-thirds of the US economy.
"We do see flat to lower home prices being a drag on consumption going forward. That represents a downside risk as well," Alexander said. Meanwhile, financial markets have been rattled by renewed worries in the subprime mortgage market tied to problems at two hedge funds managed by Bear Stearns that were heavily exposed to such mortgages.