Is the Slowdown About to Hit Home?

The numbers keep coming in, and they're all flat. Retail sales, after slipping most of the summer, are leveling off. Unemployment is essentially stuck at 4.5 percent. Manufacturing has been firmly in the tank for almost a year, and Wall Street doesnt seem to be going anywhere at all. The economy is resolutely limping along at what appears to be just above zero growth, just like it has since January.

Were on a tightrope, and holding our collective breath. Waiting for Alan Greenspans pile of rate cuts to kick in. Waiting for businesses to finish cleaning out their warehouses and slenderizing their payrolls, and ante up with some kind of capital investment. Waiting so we can all start getting richer again.

But what if, in the meantime, the roof caves in?

Treasury notes fell, mortgage rates followed, and the housing boom was on

Were talking, of course, about housing. Consumers, as you may have heard, account for two-thirds of U.S. economic activity and have been the savior of the slowdown thus far, spending more than worried economists thought they would, for a longer time. And the savior of the consumer has been the housing market.

When the slowdown hit in earnest last November and turned all the bulls to bears, bond traders got optimistic about the one thing that warms their hearts — the long-term inflation picture. Figuring the value of lent money would hold up nicely, they bid down the interest rates on the 10- and 30-year Treasury notes.

Mortgage rates followed, as they do, and the housing boom was on. Some consumers — in record numbers, in fact — refinanced their homes at the lower rates, freeing up spending money that apparently went straight to the mall or the auto dealership. Others simply looked at the sweet mortgage deals and simply bought a new home. Demand for housing went up, prices followed — according to the National Association of Realtors, the price of homes in metropolitan areas is up 10 percent so far this year, compared to 3.9 percent in the 80s and 90s — and suddenly everybody with a roof over their head felt richer in spite of some rather nasty portfolio problems.

But if the NASDAQ-cracking spring of 2000 taught us anything, its that its perfectly safe, even smart, to use the words "boom" and "bubble" interchangeably. And when it comes to the housing boom, well, the pins are out, and ready to poke a hole in the whole thing.

This week, Patrick Barta of the Wall Street Journal wrote that a home-appraisal process dominated by mortgage brokers working on commission instead of banks (who actually loan the money) may be inflating home prices beyond their worth. In Barrons, Alan Abelson devoted his weekly column to the possibility of "a jerrybuilt boom," and called the housing frenzy "the last great asset bubble" — one that may be about to pop. And TIMEs own Dan Kadlec writes this week that housings traditional year-long lag behind a falling stock market is about to kick in.

For the majority of homeowners, the roof over their heads is by far their biggest investment and the most powerful determinant of how wealthy they feel — more so even than a job and definitely more than those 401(k)s that have borne the brunt of the slowdown so far. So a true real-estate bust, in the manner of the one that hit the U.S. in the late 80s and early 90s or the one that sent Japan careening into its coma at about the same time, would almost certainly spell recession — with a capital R.

The housing bubble probably isnt yet big enough for that. But the last upwardly-mobile source of consumer wealth to survive this slowdown is definitely under siege. Because those bond traders have lately become convinced that the economy is bottomed out, long-term interest rates have crept back up and brought mortgage rates with them, in spite of the Fed chairmans rate-slashing leadership from the short-term side. And if refinancing slows down demand, home prices — especially at their present giddy heights — could drop like a brick. Bye bye, boom.

Earthbound home prices alone could put a further psychological damper on consumers who are already forsaking Macys for Wal-Mart; a slowdown in home sales tends to have a wider and more tangible effect. Housing is known as an "umbrella" sector, because a new home generally comes with other new stuff, from renovations and additions to washers, dryers and home entertainment. In other words, much of the seemingly quixotic summer strength in consumer spending grew out of the housing sector, and the housing sector may be about to cool off.

To an economy already teetering on the edge of the recessionary abyss, thats like handing it an anvil. If consumer spending finally collapses, you can bet the sound will be heard by the business side of the economy — and neither manufacturing nor capital investment (theyre closely related) will start up again in a consumer-demand vacuum.

The good news is the market rarely taketh away without a little giveth to go with it, and theres one upside to a housing chill. Those bond traders might become convinced that the sky is falling and stop worrying about inflation — bringing mortgage rates back down and putting some fuel back into the housing sector and some refi money back into consumers pockets.

The bad news, of course is for that to happen, the sky — and the roof — would have to fall first. And the prospect of a spring rebound could get buried in the wreckage.