Merril Lynch Research

I could not resist posting this article off the Reuters newswire. A prediction of a national 10% decline in house prices by a major brokerage house is a big deal.

NEW YORK (Reuters) - House prices could tumble 10 percent this year and raise the chances the United States may slip into recession unless the Federal Reserve cuts interest rates to cushion the fall in economic growth, Merrill Lynch said in research notes this week.

If correct, the prospects of this scenario will prove troubling for equities investors, who could face a stock market decline of 30 percent or more as measured by the S&P 500 index (.SPX ), the brokerage said.

Merrill said the biggest concern is that tighter lending standards in the mortgage market, even if confined to lower-quality borrowers, will constrain overall housing demand and hamper recovery in the struggling housing market.

"It is not inconceivable (given what is happening now to mortgage originations) that we end up with something closer to a 10 percent decline in home prices this year," Merrill Lynch said.

Merrill said this alone would slow the economic expansion to a rate of about 1.5 percent to 1.75 percent this year, which it termed a "growth recession."

The traditional definition of a recession is two consecutive quarters of declining gross domestic product.

...

Former Federal Reserve Chairman Alan Greenspan said on Thursday there was a risk that rising defaults in subprime mortgage markets could spill over into other economic sectors.

Greenspan said that subprime woes were "not a small issue" and seemed to result primarily from buyers coming into lofty housing markets late after big price run-ups that had left them vulnerable to hikes in adjustable mortgage rates.