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
definatly...
Ok, if you happen to run accross some stats, let me know the specifics. No need to search and sort for any. I was going to use the data to show that the remaining portion of housing under rent control is most likely still driving the cost of new housing up. You end up with more competition for less availaibility. The only benefactors of rent control are the people currently living in rent control quarters. Those families searching for housing end up unable to afford housing.......
At least that's what Thomas Sowell writes in "Applied Economics" and it makes sense to me. The "beyond stage one" thinking makes it more clear how much more affordable housing would be without rent control.
When we are done with that well find something else for the repubs to do that does not involve securing our borders, reducing government spending, or using more than UN style pressure tactics to get the Chinese to float their currency..
Ass fee? I'm afraid to ask what you get for that ass fee :^)
I am trying to figure out what the next bubble will be before it starts. Any ideas? Anyone?
;) I pay in the bathroom..
I agree. Might as well make all headlines read "Beware: Stuff could happen."
I think it's more likely that an economic slowdown will pop housing prices than the other way around.
But I could be wrong. :^)
And guess who ends up paying for that?
Be aware that in many places a debtor cannot walk away scott free from a loan. In Texas for example the borrower is liable even if the home does not cover the outstanding debt. (This happened to me. I went to California and asked a lawyer what would happen and was told that the law in CA cooperates with the law in TX and would help the TX courts atach other assets to settle the debt. The loan agencies you mentioned are not liable for the debt, they help transfer the loan in the secondary loan market, but the only one responsible for the debt is the borrower.
Now in California where the home CAN be surrendered for the debt the lender takes the hit, again not the taxpayers.
It would seem that certain markets in
California, Florida and Arizona are tracking along unsustainable trends. Where I am in S.E. Michigan, many areas have not seen any appreciation in 2 years. I see many houses that are listed for less than what people paid 2-3 years ago. Rent prices have not increased much in 5 years. I doubt the midwest will be hit as hard if some of those hot cities experience a crash.
Really?
Then you do the math, ok?
How many households are there in the US? (I'm going to go with ~100 million).
If growth supports 1.5million new houses per year and they're building two million... then they need to be replacing 500k houses in order for me to be right.
100 million households only needing to replace 500k houses per year implies that the average home will last for 200 years.
What does your math say?
Your cavalier "it needs to pop" comment sounds like someone who has either made his or hasn't purchaed yet.
It looks like 50,000 units in NYC are rent controlled, out of a total somewhere a little upwards of 3 million. These units, apparently, never come onto the open market. Another million or so units come under rent stablilization, which restricts the amount the rent can be raised from one year to the next, but allows the free market to determine the rent when the unit is open ("vacancy decontrol"). Here's a good analysis of the situation:
http://www.manhattan-institute.org/html/cr_34.htm
New York City housing is a famous example of meddling in the free market, etc. I doubt that waving a magic wand and eliminating all rent controls would bring the price of rents down significantly. Really.
The truth of the matter is, there are a lot of things that work in NYC that don't work in other places. And a lot of things that work in others places that would be a disaster for NYC. One of my strangest memories is seeing a Palestinian and an Israeli store keeper yelling in two different languages at a confused Italian American cop for ticketing an old Irish lady who happened to be a customer in both their stores.
So you live in Macon GA, but not Macon County, right?
(I'm 45 minutes north of ATL myself)
"Of course, the weather sucks in Georgia."
Yeah, golfing and fishing year-round, rather than dealing with the cold, wet winters of the miserable Northeast sucks.
It does suck to occasionally wear shorts on Christmas.
Homes in the bubble areas are not rising at the rate of inflation. They're going up about 20 to 25% per year.
We're in the Phoenix area, and home prices here are skyrocketing. We bought our house a little over two years ago and already homes in our neighborhood are selling for 200K more than that. For most people, their increased home values have little meaning, unless you sell your home and either downsize or move somewhere with far cheaper homes.
For most people, their increased home values have little meaning, unless you sell your home and either downsize or move somewhere with far cheaper homes.
I disagree. I think that a large percentage of people are succumbing to the "wealth effect." Some are not saving, thinking that the increased price of the home is "saving" for them. Others are running up credit card debt with the idea that an equity loan will get them out of trouble. And a good many are counting on the sale of that home to finance their retirement.
Nope, I live on the extreme north end of Columbus - an hour and 15 minutes from the airport.
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