Posted on 06/21/2005 9:42:59 AM PDT by ambrose
U.S. housing bubble may pop
Economists warn of slowdown in the economy by year's end
By Dean Calbreath
UNION-TRIBUNE STAFF WRITER
June 21, 2005
By the end of the year, America's bubbling housing prices will likely flatten or pop, causing an economic slowdown, economists warned in a flurry of reports yesterday and today.
Red flags issued by such diverse sources as the Merrill Lynch investment firm, the University of Maryland and the UCLA Anderson Forecast warn that a stumble in housing prices could take a major bite out of economic growth, damaging the already weak job market.
Other signs of economic trouble also loomed yesterday. The price of oil surged to a 20-year high of almost $60 a barrel and the nation's leading economic indicators fell twice as much as had been projected.
But the economists warned that the most serious problem is in the overpriced housing market.
"Policy-makers need to reckon with the end of the housing boom, which has been holding up consumer spending and the economy," said Peter Morici, economist at the University of Maryland. "With so many buyers benefiting from creative and highly questionable mortgage schemes, and regulators expressing concern about those practices, a pullback in the housing sector seems inevitable. When that happens, growth will skid."
In the past several years, housing has been a key engine of the economy, with home equity loans, refinancings and other forms of creative borrowing helping to fuel retail sales as well as construction activity.
But in a report to be issued today, the Anderson Forecast warns that the construction of new homes is outstripping the natural growth of the population.
The report notes that current population growth supports about 1.5 million to 1.6 million new houses being built throughout the nation. But 1.9 million units were built last year and 2 million are slated for construction this year, indicating that a slowdown is in order.
The report predicts a slow but steady decline in home sales throughout the second half of the year. Because so much economic activity is tied to housing, said Michael Bazdarich, senior economist at the Anderson Forecast, economic growth will decline from its current pace of 3.2 percent to about 1.5 percent by the middle of next year – assuming that the decline is orderly.
Advertisement "Beyond the housing market, there's really not much going on in the economy," he said. "The rise in housing prices has represented an inordinate part of our economic recovery. If the housing market slows too sharply, there would be nothing to sustain economic growth."
But it may not take an actual decline in housing to put the economy on the skids.
According to a report issued by Merrill Lynch yesterday, if the housing market merely stays flat, rather than declining, it could shave half a percentage point off economic growth this year and a full percentage point in 2006.
Overheated housing markets in cities from Los Angeles to Miami to New York "represent a big enough slice of economic activity that should they falter, we could see a fairly hefty impact on aggregate U.S. economic growth," warned Merrill Lynch economists Sheryl King and Claudia Lokody.
King and Lokody said that home prices have risen far above incomes in 30 of the nation's top 52 metropolitan areas.
"Six cities in the Golden State – San Diego, Riverside/San Bernardino, Los Angeles, San Francisco, San Jose and Sacramento – are well in bubble territory," they wrote.
"On average, home prices for these six cities, which represent about 70 percent of the state's population, have risen about 75 percent since the start of 2001. Per capita income growth has averaged around 3 percent since this time."
Other economists say that the predictions of economic decline are overly dire. But they add that if a decline in the housing market is combined with another economic hurdle, such as a spike in the price of oil, the effect could be serious.
Yesterday, the price of oil surged to $59.37 per barrel, up 90 cents on the day. It was the highest closing price for oil since the energy crisis of the early 1980s, when prices spiked above $80 per barrel, after adjusting for inflation.
In the past month, oil prices have risen almost $12 a barrel because of rising demand. And economists do not see the price slipping any time soon.
So far, consumers have adapted to the rising prices. In fact, gasoline usage has risen in the past several weeks despite the rise in prices.
The past two years, the rising price of oil has contributed to a slowing of the U.S. economy, which grew 3.5 percent during the first quarter compared with 4.5 percent during the same time last year.
Economists say that a price rise above $60 would not be enough to derail the economy. But if oil prices rise to $65 or $70 at the same time the housing market stalls, it could inflict serious damage.
"I don't think a price rise of an additional $5 a barrel will be all that life-threatening to the economy," said economist Morici. "But if housing prices decline at the same time that oil prices rise, then the whole economy's in the soup."
In the meantime, the nation's leading economic indicators, as tallied by the Conference Board in New York, fell by 0.5 percent, more than double the 0.2 percent that economists had been forecasting.
Only one of the indicators rose in May: stock prices. Building permits, vendor performances, consumer expectations, manufacturing orders, consumer goods and unemployment claims were all negative indicators.
The indicators suggest that growth will slow over the next three months worldwide, said Ken Goldstein, labor economist for the board, which is a corporate-funded research agency.
In a prepared statement, Goldstein warned that the sluggishness is "not just a domestic phenomenon."
The Associated Press contributed to this report.
Dean Calbreath: (619) 293-1891; dean.calbreath@uniontrib.com
Now in California where the home CAN be surrendered for the debt the lender takes the hit, again not the taxpayers.
Not only that, but for borrowers that do default and leave the lender holding the bag, the IRS gets involved. Say someone borrows $400k for a home, then defaults and the lender is able to sell it but only gets $300k because of a deflated bubble. The IRS will count that as $100k of income to the defaulter, and they will have to pay income tax on that amount. Bankruptcy won't help, because IRS debts are not forgiven in someone declares bankruptcy.
I don't understand - was that a typo or were you being sarcastic?
"Nope, I live on the extreme north end of Columbus - an hour and 15 minutes from the airport."
Ahh - my bad.
Hey - it's not Macon County, so I was half-right!!
Does this gloom and doom sell?
I've been listening to people gripe about "hyper inflated homes" for 25 years now. The only difference is that it's happening pretty much nationwide instead of just a few markets.
My wife and I were nearly $100k in debt and renting an apartment 8 years ago. Today we've got nearly $300k in equity, and that's without really trying. Had we made a few moves we seriously considered a few years ago, we'd have 2-3 times that.
When Will Rogers advised his readers in the early 30's to "buy land, cause they're not making any more of it", the three miles of beach in Santa Monica he owned was considered virtually worthless. Today, they call it "Malibu", and if he still owned it, the sales price would probably pay off the national debt of a few Caribbean islands.
Real Estate will never drop much below the margin that's mortgaged. Never. Because neither mortgage companies or home owners will pay some one to take their property. They'll just sit on it forever, and thus the price is stable.
The griping about "how will young people buy their first house with prices so high" is falling on deaf ears here. The fact is that home ownership (a few years ago anyway) was at an all time high. Don't tell me those people up and sold out and are renting now.
Yeah, yeah, ARMs are evil. But they were worse in Jimmah Carters day when the ARM started at 17%, and that was considered good, cause it scheduled to go up above 20% in a year. But the world didn't open and swallow the country, so just don't worry about it.
Boy, that's a real fixer-upper...
I know, we sold our house in West Bloomfield, MI for a HUGE profit a few months ago and downsized to a smaller one (all but one child moved on their own) because we knew the market was stretched way too tight for this market and it could only go down from there.
No problem. Lots of people in Georgia forget that Columbus is here. :)
I'm only counting on the sale of one of my houses to do that. One has already nearly doubled in value in 4 years, and the other was worth 15% more than I paid for it 4 months ago. I can keep both till I retire, and with even modest gains the sale of one will pay off the other.
Real Estate will not crash like the stock market can. Neither people or mortgage companies will pay people to take their property.
As long as the population is growing (it is), and they're not building more freeways in large cities (most aren't, thus trapping workers in a fixed radius) then real estate will continue to go up. Even if they have to bulldose homes and put up high density housing in order to pay the higher prices.
The mortgage lender biz is booming from all the re-fis... people are borrowing against the inflated value of the home.
"Lots of people in Georgia forget that Columbus is here. :)"
True, even though I'd personally rather live in Columbus than Macon. Canton is nice, though Atlanta creeps closer by the day...
No doubt man - essentially, prices HAVE to flatten, if not soften, here in Cali, or else we'll lose lots of jobs as employers move out of state due to the housing costs. Even execs cannot afford to move here (unless they want to live in very plain, old ranch homes!).
Speculators.
Columbus will *really* grow if they ever continue the interstate *through* the town instead of just *to* it.
Indeed, might be a twofer. Oil prices cannot continue as they have. It is telling that oil speculators are now issuing "reports" - in which they try to portray themselves as "analysts" - which are meant specifically to play into the whole "Earth Changes" / "Peak Oil" / "Art Bell" crowd's hysteric mentality. I heard T. Boone Pickens trying to play up the price, claiming ongoing rise through next year. You known when you see these things, that those who have large, recently acquired futures positions are getting worried, and are resorting to all sorts of trickery to try and prolong the totally unrealistic market long enough to get out with a gain.
It's a seeming article of faith that globalism is here for all eternity and that we are "beyond history." Look at all the books about it - most recent example being Friedman's "flat earth" book. But history would indicate that this particular wave of globalization (hardly the first) will end just like all the others have. Any businesses whose value propositions depend on globalization will be hosed not if, but when, the current wave ends.
"people moving into the area can't afford the 400k single family homes, so they buy nice townhomes for 395k"
Man, I am Mr. typo this week.
read as...can't afford 400k single family homes....buy nice townhomes for 295k.
Too bad for all of them .... suckers!
What your house is "worth" on the market is only relevant if you want to sell. If you plan to continue living in it (and that is what houses are for, right?), it makes no difference what it could fetch at the moment. The reason housing prices are going up in the bubble areas is supply and demand - more buyers than sellers. What that means to me is - people are staying put, despite the prospect of inflated profits. As long as this situation pertains, how is the bubble going to pop?
Estimates vary - but about 25 to 30% of recently purchased homes (last 5 years) are not owner occupied.. They were purchased by investors/speculators, and then rented out at a loss (or even left vacant), based on the belief that they could flip it in a couple of years for a quick profit.
bttt
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.