U.S. housing bubble may pop

San Diego Tribune ^ | 6/21/05 | Dean Calbreath

[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

[ambrose]

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[IMRight]

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.

And how many houses become unusuable and need to be replaced? I bet it's more than the difference.

[thoughtomator]

This housing bubble NEEDS to pop or much of this next generation of adults will never get the opportunity to be homeowners, without signing themselves into debt slavery for the rest of their productive lives.

[finnman69]

Those are frightening examples. Who the hell is dumb enough to buy those homes at those prices?

[misterrob]

If it goes POP then they never will be able to afford a home when the economy shrinks into nothing and everyone is ruined.

[Terabitten]

This housing bubble NEEDS to pop

It'll be interesting to watch both the housing and the oil bubbles pop.

[2banana]

Today people wonder how they could have paid $235 a share for a book warehouse with a website back in 2001...

Tomorrow they will wonder how they could have paid $657,000 for a 3 bedroom shack located next to a highway in 2005...

[ambrose]

Speculators buy crap like that and then rent them out to tenants at a loss... so they can sell it to someone else in a year or two for a profit... and the process repeats itself over and over. That 330k Compton POS wouldn't rent out for more than $1200 a month,.. probably closer to $1000.

[TheDon]

U.S. housing bubble may pop

or

U.S. housing bubble may not pop

The word 'may' should be disallowed in story titles.

[thoughtomator]

Yep. I wonder how many people would have bought new homes if prices were not doubled and tripled by speculation? And if gas prices drop at the same time, it could be a recipe for a fantastic renewal.

[TheDon]

It's the land, not the house, that is so expensive.

[the Real fifi]

Housing is very expensive in southern California, but I doubt the market will "pop" rather than stop climbing so precipitously. More people still move there than move away and there is not enough buildable land (even accounting for the fact that Californians seem able to contruct on lots that are vertical, not horizontal).

[softwarecreator]

You are right, it's way out of control.  I still can't understand how the average family can afford a home in California.

I would hate to be one of the people who paid mucho $$$$ for their house when the bubble breaks.

We just bought a home in our area which is slightly below market value.  We got very lucky because the owners were desperate to sell and we got first crack at it.  Otherwise our choices we unbelievable out of wack to what we know the normal housing costs to be.

[Pessimist]

Normally I don't care much about the "housing bubble", since here we don't really have one here in Cleveland, OH. But yesterday I read in the WSJ that some economists now think that because the bubble areas are so pervasive, a pop in those bubbles could actually drag down the entire US economy. If I recall correctly (and I often don't), something like 45% of the current housing value in the US is in what are considered bubble markets (ie > 30% gain over the last 3 yrs).

This will probably end up just like the dot com boom and bust. Rational, conservative investors will end up getting gutted by the market too, all because of the greed and "irrational exuberance" of the relatively few.

[Sam the Sham]

But there is no oil bubble.

China is a huge industrial power. That will not change. So forget about cheap oil until some bright boy figures out a cheap way to get oil from coal or shale.

[softwarecreator]

Frightening is a good word for it, I was shocked when I saw what $300,000 buys in CA.  In my area that shack would sell for less than $30,000, if it sold at all.

[ambrose]

Compton?

[Pessimist]

"I would hate to be one of the people who paid mucho $$$$ for their house when the bubble breaks."

No problem. They'll just walk away from the loans and let the banks (or Fannie Mae or Freddie Mac) take the hit.

And guess who ends up paying for that?

[softwarecreator]

That's obvious because that "house" is worth about $200.

[ambrose]

There is still plenty of land in SoCal. The problem is with our roads. No new roads/freeways are being built, so commutes from cheaper areas are nearly unbearable.