Friday, November 11, 2005

Is It Panic Time?

Much gloom and doom is predicted in an Associated Press story by reporter Ellen Simon. It refers to the same July report of the Center for Economic and Policy Research reported here at The Boy in the Big Housing Bubble back in August when the San Francisco Chronicle first reported on it. This latest Associated Press report updates readers on the issue, pointing out the debate that's brewing, and how many economists and investors have since concurred with some of the doomsday predictions.

It is curious to watch this story develop. I have never seen anything like it in my lifetime. Economists have always struck me as being careful commentators. Few of them fly off the handle, or shoot from the lip. They choose their words carefully, and then proceed cautiously. When they use strong language, you can be sure they've got the facts to back up their point of view. And so, as more of them begin to sound the doomsday alarm, the more concerned even I become.

Here's an excerpt from the Associated Press story:
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, housing prices will plummet, said Mark Zandi, chief economist at, an independent provider of financial research. If rates increase 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.
Read the entire story at this link.
— The Boy in the Big Housing Bubble