The Washington Post had a front page article on the downward revision to 4th quarter GDP reported by the Commerce Department yesterday. The article cited higher oil prices and state and local budget cuts as the two major threats to growth in the immediate future.

Remarkably, the article did not mention falling house prices. Since their peak last summer when the first time buyers tax credit expired, house prices have fallen by more than 4.0 percent. They are currently falling at the rate of 1.0 percent a month. This would imply a drop of more than 15 percent by the end of 2011, which would correspond to a loss $2.4 trillion in housing wealth. A loss of wealth of this magnitude would reduce annual consumption by $120-$140 billion.

This loss of consumption due to a drop in housing prices would be a considerably larger blow to the economy than either the budget cuts and tax increases attributable to the state budget shortfalls or a rise in the price of oil that is twice as large as what we have seen to date. It is amazing that the Post is oblivious to the situation in the housing market even after the collapse of the bubble threw the economy into the worst downturn in 70 years.  

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