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
Just before the stock market bubble burst in 2000, the MSM was also quoting contrarians who calmly gave three or four reasons why the stock market bubble was a myth and how the new economy was different and why traditional fundementals were for losers, yada, yada, yada. The only difference then is that the MSM qouted the contrarians at the beginning of the articles rather than at the end in an effort to prop up Little Willie Clinton's economy. I went 90% cash in March, 2000, not because of what the MSM said or didn't say, but because of my own research and gut. I was very right then and I made a lot of money during the crash by simply not losing money.
I've applied a similar analysis based up traditional fundementals and values with a healthy dose of my "gut" to the current real estate market, and I believe we are already in the beginning stages of a real estate bear market, which will become a major meltdown in many (althought not all) markets. Mark my word. Eighteen months from now, you will see how very right I am.
And how many houses become unusable and need to be replaced? I bet it's more than the difference.>
Also, the new trend is to own two or more homes -- the extra for vacation, rental or future retirement. With the price of building supplies swinging up with the price of oil, it might be a bubble or the way it's gonna be...
Now THAT is funny....I love the U.S. when reading something like that....
Walk into any bar in NYC, L.A., Chicago or any number of U.S. cities and you'll see people whose ancestors one, two or four generations ago would have been at each other's throats in a murderous rage. And know what they'll be doing? Playing pool, hitting on the waitress and discussing real estate, etc. etc. etc. etc.
Hitler thought this was our weakness. Radical Islam thinks it's our weakness. It's our strength.
I saw some good data on So Cal hosuing prices going back to 1982.
Right now the bubble is probably worse than in 1987-90 as hte run up from 2001-04 has been greater than in 1987-90.
When the bubble did burst in CA prices fell about 20% but it took 5-6 years to bottom out. What you had wasnt really a popping as much as air coming out of the balloon. From 1991-96 housing prices fell by 1-5% each year. Each individual year didnt look to bad but cumulative it was pretty bad
""Is Atlanta on the list of bubble real estate markets?""
not even close...4% annual appreciation in home values...HOWEVER GA leads the nation in interest only loans
""I think it's more likely that an economic slowdown will pop housing prices than the other way around.
But I could be wrong. :^)""
youre actually 100% correct....there has never been a housing price decrease in the USA without a recession preceeding it.
In So Cal in the early 1990s, prices peaked in 1990-91, but the recession began in 1990.
A recession will pop the bubble, the popping bubble will reinforce the recession.
Bubbles dont pop on their own, they need some outside variable to do it
I wonder how often people say, "if only I hadn't bought that house twenty years ago".
Sounds right to me!
My parents bought a house in Palm Springs for $289,000 in April of 2004, now it's worth $389,000 ,Amazing
Recall in this case that the government agreed to reimburse the S&Ls for losses owed to their "depositors" they had no requirement to reimburse borrowers. When the S&Ls went under because the S&L loaned depositors money (all of which was covered by the government) on bad loans, the government was on the hook to protect the S&L depositors. The borrowers were still on the hook for the loans unless they could declare bankruptcy in which case the banks took a loss. This loophole in the depositor protection was fixed and new limits for S&L deposits on hand were implemented. and deposits are now only protected by the FDIC and savings and loan group with the same function, (Up to 100K) per depositor. But this does not mean the gov steps in to cover bad debts.
I believe this "crisis" will not result in a massive government bailout. But I guess we will see.
forgive my ignorance, but what is an "interest-only" loan?
where for the longest time you are only paying interest on the loan, no principle
As was stated below a loan where you only pay the interest for a long time, eventually though the principle comes due. A variation on the old Baloon mortage.
Shockingly according to Money magazine in 2005 these itnerest only loans accounted for about 1/3 of all new mortgages, with ARMs making up almost another 1/3 and another 5-10%(?) or so of subprime or noncomforming.
Correction the article said that regarding 2004.
If I recall correctly, the stock market sold off heavily the day the feds sued microsoft and it was all downhill from there.
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