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Economy and Housing Market Rebounds, But Will It Last?

(10-30-09) Statistics revealed this week showed the U.S. economy fighting back from a long dark period, and prompted some analysts and officials to declare the recession over. But when it comes to the housing market in particular, analysts also warned the boost may be temporary.

Gross domestic product (GDP) rose at a 3.5 percent annual rate in the July through September period this year, the best quarter for growth in two years. GDP, which measures the value of goods and services made within U.S. borders, grew in part due to a jump in government spending on the strength of the February federal stimulus bill. Other factors included a rise in consumer spending, housing market balancing, and businesses ramping up production, all three of which were boosted due to government supports and programs like Cash for Clunkers.

The GDP's spike comes after severe contractions in the past year. A committee of economists will make a formal determination of whether the recession, which began in December 2007, is officially over when more complete information is released.

At the same time, several sobering statistics bring these figures back down to earth. The unemployment rate continued to rise during the same time period, up to 9.8 percent in September. Last week, 530,000 people filed new applications for unemployment insurance benefits, according to the Labor Department. In the banking world, 106 bank failures have occurred this year, the most since 1992 and the height of the savings-and-loan crisis. Plus, an unknown number of banks remain open even with severely weakened assets and ability to do business.

Analysts also warn that since the growth in the last quarter was mostly on the strength of government recovery programs, it is unclear what will happen when these programs end.

On the housing front, there is good news. Over the quarter, investment in housing rose at a 23.4 percent annual rate. What that translates to is more modest than it sounds – the sector has been down so dramatically that even a bit of growth resulted in major percentages. The improvement is directly related to government policies, including the $8,000 first-time homebuyer tax credit, foreclosure prevention programs, and Federal Reserve moves that reduced mortgage rates.

Analysts note the boost, which included a 9.3 percent jump in existing home sales in September, is the latest sign that the housing market is rebounding. But again, it's unclear if this is only a temporary effect. When the tax credit for first-time homebuyers expires at the end of November, sales may flatten or fall. Additionally, which rising unemployment, more borrowers may be pushed into foreclosure, more homes will be on the market, and prices will again fall.

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