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
Remember in the late 90's when they said the era of business cycles was over because of the "new economy"?
I live in Northwest DC and I can attest to the rise in prices and their rationality. Not only is employment boomng here, but, as in So Cal, commutes are getting more impossible than ever. (We are only behind LA in length of commuting time.) If mortgage rates go up substantially, prices may level off but I do not see a "pop". The only time the housing market here was troubled was during the presidency of Jimmy "the putz" Carter when financing even at very high rates was hard to get. Many people who could afford those rates couldn't come up with the necessary 20% downpayment, Houses in my neighborhood stayed on the market longer, but prices remained fairly stable even then.
Quote: Remember in the late 90's when they said the era of business cycles was over because of the "new economy"?
There will never be a housing collapse because things are different this time. (sarcasm)
Seriously I remember all the people, many on this site that said there may be a slight hiccup in the nasdaq but it would be 5600 or 6000 by the end of the year 2000. I followed stocks back then pretty heavy and the same exuberence over making stupid money on homes today was the same exact exuberence I remember in 98-00 over the Dow.
That's what I did. My home in Va Beach nearly tripled in value over nine years (most of the increase over the last three years). We cashed in and bought a home 3 miles south of the state line in NC. Everything is dirt cheap down here. I work in the same place, and my commute is not that much more than what I was doing before. We're now debt free, and my wife can be a stay-at-home mom.
I think so. One of my "hobbies", is income real estate investment. In Hawthorne CA, (near LA), a seven unit apt. bldg.. was offered for $1m,395K with rents at only 1/2 the amount to crack the nut on a mortgage with 20% down. It's a bigger fool deal if I ever saw one.
Since the Omnibus Tax Act of 1986, such deals (loosing money for tax advantages) don't make any sense. It's time to hold cash, or notes with 1st. position and equity.
We got pressured to do an ARM (a *2* year arm), or an interest only, but decided to pay a bit more and take the 30 yr fixed. We also were told we should look at much nicer houses, like 250K...
People who are buying such expensive houses that were a few years ago half the price should have their heads examined..
Yes. Clintoon, Podesta, Brown, Rubin, Daley, et. al. Like you could say something and it would become true. Dickheads.
5.56mm
It probably won't "pop" or burst in 95% of the country. It very well may and probably will flatten off as Merrill Lynch predicts. Shaving a half point off GNP will hardly be disasterous. CHICKEN LITTLE WARNING.
Your "pizza delivery rule" has several holes in it. The most gaping being the bubble bursting in the pizza industry. Since everyone is on low-carb diets, you may have to have a back-up plan such as a fish delivery truck or Jenny Craig counselor.
Can you define "new" housing. I suspect it goes way beyond my normal definition, especially since there is very little space available for traditional new housing. In addition, can you offer the percentage of total housing that "new" housing represents.
Thanks.
:) Funny..
You should make up the $150 difference at tax time (interest deduction).
Not all markets are exhibiting bubble behavior. For example, Texas real estate has done little more than grow at the rate of inflation.
I remember the question being asked... how do you make money shipping a 40 pound bag of dog food (free UPS second day shipping!) at 40% off retail price... people would shrug their shoulders and note that the price of the stock was going up and would buy anyway.
It's kind of inconvenient to do the research now, perhaps later. However, "new housing" is basically defined as a new building. There are probably some loop holes in which you can take an older building, gut it and call it "new housing," but overall the commonsense definition applies.
However, I think I know where your confusion stems from -- to the outside eye, NYC looks like a finite amount of land into which you couldn't possibly cram another building. In reality NYC is constantly under construction. New buildings going up all the time to meet some new need. This is largely due to the amount of money available. Want to build a new hotel? Here, take this $300 million and buy a couple of 1970s era buildings, tear'em down and start building. It's a constant process of tearing down and building back up...
Thanks.
The house I bought 4 years ago has gained so much in value that if I sell it today for a reasonable price, I will get more back than I paid in mortgage payments.
Why would anybody pay any amount of rent, if they can live in a nice house and get paid doing it?
Not that I think this will last forever. But I've seen predictions of "bubble bursting" for years, while the So. Cal market has continued to climb into the stratosphere for decades with no end in sight.
Yeah, they had a 10% slump in the 90's, and it might happen again soon. But big deal. There's no way people will pay buyers to take a house when they've got a 95% mortgage. They'll either refuse to sell, or walk out and let it be repossessed. In Houston in the 80's, they had entire neighborhoods up for sale for years, and even the repossessed houses that sat empty for 5 years weren't sold for less than 90% of the original price.
One should never confuse Wall Street with Elm Street where the home owners have a mortgage to pay. Those houses WILL NOT drop in price like the stock market does. They may go flat, or gain only a little, but home prices will never seriously drop.
I think it would be interesting to see if the majority of "doom-sayers" are renters and if the majority of "no problemos" are home-owners.
If so, one group is involved in "wishful thinking", IMHO.
BTW, I'm an home-owner...
Because to some buying a house now that may drop a good deal in value, and pay mostly interest in the first couple of years is not a great idea. Then there are people who realize ARM's are very very evil little things and may not qualify for a straight up fixed interest mortgage for the amount of many hyper inflated homes..
I'd say both groups are involved in wishful thinking and both are due for some disappointments.
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