Merrill Sees Possible 10% Fall in House Prices

The contraction in subprime lending and the overhang of a large number of unsold homes on the market could lead to a 10% decline in house prices this year unless the Federal Reserve cuts interest rates, according to a Merrill Lynch economist.David Rosenberg says he expects the slowdown in housing to force the Fed to cut interest rates by 100 basis points during the second half of this year to keep the economy out of recession. Even with the Fed cutting rates, he projects that housing prices will decline by 5% in 2007 and be flat next year. Loose subprime lending practices boosted new-home sales by 20% during the boom. But now tighter credit is making it difficult for financially strained borrowers to avoid delinquency and default. "Therefore, units they vacate are going to compound what is already a record glut of unsold homes on the market and accentuate the deflationary pressure on the price front," Mr. Rosenberg said.