U.S. faces hardships from housing, markets-Paulson

By David Lawder

WASHINGTON (Reuters) - While tax rebates will help support the U.S. economy the rest of the year, the job market will be curbed by housing, credit and energy problems, U.S. Treasury Secretary Henry Paulson said on Thursday.

"While the stimulus is making our economy stronger than it would have been otherwise, the housing correction, credit market turmoil and high energy prices remain a considerable drag on the economy -- and the effects of this drag can be seen in the soft job market," Paulson said in remarks prepared for delivery to the Exchequer Club in Washington.

Paulson said he believes the U.S. economy will continue growing this year "although at a moderate pace."

"We are making progress, although not in a straight line. Housing continues to be at the heart of our economic challenges and remains our most significant downside risk," he said. "We must work though the necessary adjustments in housing and credit markets to return to growth next year and beyond."

Paulson said his "first, most urgent priority" was to work through the housing downturn and capital markets turmoil and he will focus on that until those situations are resolved.

However, he said that could take a while because housing prices are likely to continue falling into next year and mortgage foreclosures and inventories of unsold existing homes are likely to "remain substantially elevated this year and next."

He noted there was a 10-month inventory of new homes on the market and an 11-month inventory of existing homes, compared with a historical average of about six to seven months.

Paulson said working through inventories was the key to stabilizing housing and financial markets.