Florida newspaper article on US housing bubble burst

TomF

I received this column from my brother today and it certainly paints a pessimistic picture for what could happen in the US if the housing bubble there bursts. It makes me wonder how much worse it could be here. Maybe supply and demand aren't "out of whack" in Ireland and that is protecting us.

Economists expect sharp recession after real-estate bubble bursts
By Ellen Simon
The Associated Press

November 12, 2005
NEW YORK · Much of the nation has had a lovely real estate boom for
the past five years, but the house party is almost over and the
cleanup won't be pretty.

That's the word from economists and investors who have watched
housing prices march ever higher.

"The collapse of the housing bubble will throw the economy into a
recession, and quite likely a severe recession," warned a July report by
the Center for Economic and Policy Research.

In recent weeks, many major investment firms have concurred. Said a
Lehman Brothers report, "[A] turn in the housing market is central to our
economic forecast. "

"The demographic story behind the housing market boom, as we always
thought, was a giant hoax," wrote Merrill Lynch & Co.'s North
American economist, David Rosenberg, in a recent report.

If housing prices decline sharply, the effects could be broad. Lehman
estimates one-third of the past year's U.S. economic growth was a
consequence of the housing boom. Housing construction is equal to 5
percent of the national economy.

A downturn in housing could mean more than 1.3 million lost jobs,
Goldman Sachs Group Inc. predicts, bumping up the national
unemployment rate by 1 percent and the unemployment rate in house-mad
California by 2 percent. Those numbers don't include likely job cuts in
housing-dependent businesses, such as banking, furniture and building
materials.

The Center for Economic and Policy Research predicts worse, saying a
bubble burst would mean the loss of 5 million to 6.3 million jobs.

The housing run-up has financed consumer spending, creating more than $5
trillion in bubble wealth, the center estimates. Consumers have used
"cash-out" mortgages to pay for everything from new kitchens to college
tuition.

A final nightmare scenario: A federal bailout of the mortgage market is
likely if housing crashes, the center predicts. So, if corporate pension
funds continue to falter and this dire prediction does come true, the Feds
could conceivably be holding your mortgage and your pension.

While there's disagreement on what a downturn will mean, it's widely held
that a number of factors could bring prices down. A decline in prices will
track interest rates: If rates go up sharply, prices will plummet, said
Mark Zandi, chief economist at Economy.com, an independent provider of
financial research. If rates rise slowly, housing prices may ease
gradually.

Others point to simple supply and demand. Bubbles have their own
psychology -- a neighbor tells you at a party that her house has
tripled in value and you feel like an idiot for renting -- but supply and
demand operates on logic, which has to kick in at some point.

The supply and demand picture for housing looks out of whack. For six
straight months, ending in September, builders started work on more than 2
million new homes. This has only happened three other times in the postwar
period, according to Merrill Lynch: 1971 to 1973, 1977 to 1978 and early
1984.

Those periods were fundamentally different from today in at least one
respect: More people were forming households. Household formation is the
growth rate in the number of households and it's boosted by new
immigration and twenty-somethings leaving their parents' homes. It is
currently half what it was for most of those peak periods.

"At no time in the past three decades has the gap between household
formation and housing starts been as wide as it has been over the
past 12 to 24 months," Rosenberg wrote. "We've become accustomed to
hearing about how housing is in a new paradigm, that the fundamentals are
sound, so on and so forth. But please, just don't tell me that the sector
has managed to divorce itself from supply and demand realities."

Another indicator, unsold homes on the market, also points down. The ratio
of inventories to sales has been rising rapidly in recent months and
stands at its highest level since 1996, according to Wachovia Corp.

Rents provide more evidence of an imbalance between supply and
demand. Since World War II ended, sale prices for homes have
generally kept pace with the overall rate of inflation, and rents
moved at the same pace. That hasn't been the case for the last eight
years, according to the Center for Economic and Policy Research.

Copyright © 2005, South Florida Sun-Sentinel

nesf

I'd appreciate it if you linked to the original article and didn't post the entire thing on here. Do an extract, link to the rest or similar. Cheers.

garred

Its just another opinion on the "property bubble". A lot of the experts reckon unemployment will cause a fall in property prices but employment has never been better at the moment. There are so may factors that dictate the demand of property that God himself probably could'nt predict what will happen.