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
End o' the world bump
Yep... 70 degrees in February... that sucks :)
Please understand that the MSM sees the housing boom as the only thing holding up this economy and consumer spending. If they can derail that boom and wreck the economy, they can wreck George W. Bush and set the table for Hillary. That is the primary reason why the MSM is in total lockstep manic mode about this.
Further evidence of this comes today from Morgan Stanley's Chief Economist today, Steven Roach. roach blasts the Fed for "an irresponsible, reckless monetary policy," holding rates artificially low, "fooling asset-dependent American consumers to keep on binge-buying." Roach, who has been a HUGE contibutor to Hillary Clinton and the DNC, actually says "We need politically independent central bankers. That's what's missing right now". This clearly means that Roach wants the Fed to ratchet up rates fast to kill the housing boom and destroy Bush.
Don't allow the MSM and Hillary stooges to destroy your confidence in the housing market, which is strong for fundamental reasons which are quite sound. DON'T PANIC. That is what the Left want you to do.
It is the humidity that would kill me.
"...because in NYC the same apartment would rent for $8,000 to $10,000?"
Ah, the success of rent control. Liberal policies at work......
"The land is much cheaper,...."
Until those same liberals start to institute the land restrictions they successfully got passed in their previous hometowns. Then they'll wonder why the price of land goes up to the point that they can no longer afford it.
Not in housing - people don't PAY for houses, they get mortgage loans and then pay off the loan. The irresponsible acts of the lenders, in so-called "creative" financing, have enabled the skyrocketing prices of real estate.
I hope this bubble bursts and soon, and lenders return to sane, responsible, and non-predatory practices.
There is almost no rent control left. It's just a pricey city to live in...
Well, there *is* that....
"There is almost no rent control left."
Available or that the policy no longer exists?
"It's just a pricey city to live in..."
Probably a good portion of which depends on the answer you provide to my first question.
Quote: No problem. They'll just walk away from the loans and let the banks (or Fannie Mae or Freddie Mac) take the hit.
Md Dad sold some real estate on the side in early '80's when interest rates were 14-16% and housing prices dropped like a rock. He remembers couples trying/hoping to sell homes for 3/4 of what they paid and being happy with that outcome. Back then homes in our area were 50-60K and if you got hit with a 10K loss you wrote a check. Today people will be getting hit up for a $150-200K loss and will not have the money when the piper comes calling.
I think it will be worse today when it hits because of all the speculating/intrest only loans and HIGH preoperty taxes to come
Is Atlanta on the list of bubble real estate markets?
...and then there's the kudzu -- which comes in through the windows at night, logs on to porn on your computer, eats all the food out of the fridge and plays with household pets in ways that psychologically damage them for life.
You said, "The word 'may' should be disallowed in story titles."
You're right...
But "spinning" the news is SO much more fun than simply reporting the news.
I seriously doubt it...
We're all gonna die!!!!
*****
You sh*t..I spit my coffee out when I came to your post.
All "new" housing is pretty much free of rent control. There are exceptions, such as when a developer cuts a deal for tax breaks to offer "affordable" housing to middle income tenants, etc.
Such is life.
Be prepared.
5.56mm
The biggest danger now is from people who bought second or third homes as investments. While an owner-occupier may be able to/willing to ride out any correction, the same cannot be said for the "investors"... they'll drop their properties at the first sign of trouble.
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