Personal Finance

Dr. Jai Maharaj · Guest

Housing market closing doors, and recession lurks, experts say

AP (via Winston-Salem Journal)
Saturday, November 12, 2005

Housing market closing doors, and recession lurks,
experts say

Federal government may end up holding mortgages, pensions

The Associated Press
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 companies have
concurred. A Lehman Brothers report said, "(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 that 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 that 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 is 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, the chief economist at
Economy.com, 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.

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 happened only 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 is helped by new immigration and
twenty-somethings leaving their parents' homes. It is now
half what it was for most of those periods.

One problem is affordability. Affordability for first-
time home buyers is the worst it has been in 20 years,
which brings to mind an old parable about the stock
market. A woman buys up a company's stock, driving up the
price as she goes. Eventually, she tells her broker to
sell.

His response: "To whom?"

"House prices are at the mountain top," Zandi said. "All
roads lead down. It's just a question of how steeply."

http://www.journalnow.com/servlet/Satellite?pagename=WSJ/MGArticle/WSJ_BasicArticle&c=MGArticle&cid=1128768101812

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A giant bubble, Clinton's creature born in late 90's,
which was at first a stock bubble and later morphed into
a housing bubble, is about to pop just in time for
Greenspan's retirement?

This will affect China. If the American economy tanks, so
would the Chinese economy. The ugly confrontation between
two countries could finally unfold unless China implode
on its own before the confrontation.

Posted on 11/12/2005 12:06:06 AM PST by TigerLikesRooster

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-To: TigerLikesRooster

They're talking about the N.Y, housing BUBBLE. This is
regional; NOT nation wide.

Instead of an apartment going for 6.5 million, the last
month sales had prices a bit ( like maybe a couple of
$100,000 ) down. Once the year end bonuses get handed
out, the Wall Street and banking guys will be spending
again.

One of the problems with this housing market, which is
new, is the "flipping."

Posted on 11/12/2005 12:14:29 AM PST by nopardons

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-To: TigerLikesRooster

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