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
heh
I live in the WashDC/Baltimore area ( I appreciate your condolences)...the real estate market here is exploding but it really isn't irrational at all, it is very market driven.
I live in a townhouse in the suburbs...and people moving into the area can't afford the 400k single family homes, so they buy nice townhomes for 395k...the people buying the standard single family homes, are willing to pay that price due to supply and demand in the real estate market in this area....me I'm cashing in and moving to a low cost small town. It's a great opportunity for myself and my family to get a great standard of living and get out of the ratrace...several others where I work are doing the same thing, moving the Research Triangle in NC, York, Pa, Pittsburg, Pa, Charlotte, NC.
We already know how to get oil from coal and from what I've read it's economical somewhere in the $50/barrel range. No energy company is currently making the investment to build these plants, which should tell you something about where they think prices will head.
Go here or search on coal gassification or liquification to get info on it.
That's chicken little talk. The generation after the Depression had some of the best prosperity the world has ever seen.
I've been through a few booms and busts in my short time on earth. What I can tell you is that people: (1) Generally don't learn from their mistakes and (2) Rarely see more than a few months down the road.
The best bubble indicator, per the Economist, is a wide divergence between the monthly cost to rent a place and the monthly cost to purchase it.
It has to wait til I sell and move in 2 years!
Run some of these illegals out of California and housing prices will fall
Yes, the technology has been around since the war.
But until we have a decade of oil at $50 a barrel, investment in alternate fuels will remain miniscule.
Pics of Usonian Homes!
I figured out the resistance to the housing market bulls -- it's the word "pop." The phenom makes more sense to them when phrased as "sudden decline."
I'm renting a 1400 square foot apartment - 3 beds and 2 baths, in a relatively new apartment complex - for $850 a month here in west Georgia. Why on earth should *anybody* buy with prices the way they are?
"It's the land, not the house, that is so expensive."
Ding, ding, ding, we have a winner!
We can thank the environazis for the price of land in these land restricted places. If the market were able to work freely, we would have affordable housing available to all economic levels. As long as the environazis control the use of the land in these areas, there won't be a "pop".
Are you near any major city?
...because in NYC the same apartment would rent for $8,000 to $10,000?
FLW just rolled over...
I'm in a city of 200k or so, about an hour south of Atlanta, GA.
"Early in life I had to choose between honest arrogance and hypocritical humility. I chose the former and have seen no reason to change" -- flw
Riverside County is growing like crazy. The land is much cheaper, and the people I know moving there have very nice houses.
Holy crap. $850 for 1400 sq foot apartment... hour from Atlanta.
Of course, the weather sucks in Georgia.
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