WASHINGTON --For months as the U.S. housing market unraveled, the Bush administration, the Federal Reserve, and most economists maintained the decline did not risk hitting the economy at large, but economists are growing increasingly concerned the broad economy may take a hit.
An abrupt exodus of more than two dozen so-called subprime lenders from the market has heightened fears other lenders may soon start choking off credit to businesses and consumers.
Economists, and the Bush administration, agree falling house prices and rising defaults by borrowers with poor credit in the subprime mortgage market may mean slower U.S. economic growth this year.
"We know that the housing market will have an impact on GDP over the next six months," Edward Lazear, chairman of the White House Council of Economic Advisers, said this week.
When asked how subprime mortgage market troubles would weigh on the economy, Lazear said the banking sector was still strong, but delinquencies are high and lenders, even outside of the subprime market, have begun to tighten up credit.
"It's clearly going to increase the cost of capital and on the margin its going to be less conducive of capital spending," said Richard DeKaser, chief economist at National City Corp. in Cleveland.
According to the Mortgage Bankers Association's most recent data, the proportion of mortgages in the initial stages of foreclosure during the fourth quarter of last year hit its highest in the 37-year history of the association's survey.
In addition, commercial banks have tightened their lending standards. According to the Federal Reserve's most recent Senior Loan Officers Survey released last month, which covered lending business at the end of last year, domestic banks reported tightening standards on all residential mortgages, the highest net fraction seen since the early 1990s.
"The extent of the tightening of credit conditions for borrowers has yet to be fully clarified, and bears continual monitoring," Citigroup economist Steven Wieting wrote in a report this week.
About 45 percent of bank loan officers in the Fed survey said they expect a deterioration in the quality of the loans they make, ranging from loans for business investment to commercial real estate loans.