Will the Housing Slump create a recession?

NYU Professor and Guru Noriel Roubini is arguing that it will--that the housing market is about to crash (especially in coastal cities, although not in Washington, D.C.), and that the crash will lead to a recession.

Housing is manifestly cooling off; housing is also a far more powerful leading indicator of the business cycle than business investment (see my 1997 paper in Real Estate Economics for the scoop on this. Email me if you want a copy).

But my model says it hasn't cooled off enough yet to produce a recession (despite what I told my colleagues the morning--oops). According to NIPA, seasonally adjusted residential invesment is off 6.3 percent in the second quarter, and was off a total of 1.2 percent in the previous two quarters. This should shave about .6 percent off of GDP; not a nice number, but not enough in and of itself to create a recession. If housing continues to get worse (and anecdotes suggest that it might), we could well get a recession by the second quarter of next year. I will wait for the third quarter residential investment numbers to come out before saying more.