Slower Economic Growth Predicted by Freddie Mac

U.S. housing sales are declining at a greater-than-expected pace that will shave 1 percentage point off economic growth in the second half of 2006, Freddie Mac said in a forecast Tuesday.

Sales of new and existing homes probably will total 6.76 million this year, a drop of 9.4% from 2005’s record 7.46 million homes sold, the McLean, Va.-based mortgage buyer said. Freddie Mac a month ago had predicted a sales slump of 7.9%.

“The weakness in housing is slashing economic growth,” Freddie Mac Chief Economist Frank Nothaft said in an interview.

The Federal Reserve said in August that the housing sector’s “cooling” was weakening the economy as the central bank ended a series of 17 consecutive increases in its overnight lending rate. Home sales and ancillary purchases such as new furnishings and renovations account for as much as 23% of gross domestic product, according to the Joint Center for Housing Studies at Harvard University.

Freddie Mac’s new forecast echoes comments made last week by Fed Chairman Ben S. Bernanke. The housing slump will lop about a percentage point off economic growth in the second half of 2006 and restrain expansion next year, Bernanke said Oct. 4 during an speech to the Economic Club of Washington.

Housing sales probably will continue to tumble until the first half of 2008 and result in a 27% cumulative drop, said Richard DeKaser, chief economist at National City Corp. in Cleveland. That would surpass the 25% decline seen in the 1986-to-1991 housing slump, he said.

This year, the housing slump will cause economic growth to average 2.3% in the third and fourth quarters, down from the 3.3% it would have been without a decline in home sales, Nothaft said in Tuesday’s forecast.