Housing may sting more than dot.com bust
If a housing bubble bursts, even if in only some states, it could throw the US economy into a recession. 2007 looks to be a bad year!
Housing may sting more than dot.com bust, Money, 5 July 05
WASHINGTON (Reuters) - Whether it's a national bubble or just pockets of regional froth, an end to surge in home prices could inflict economic harm that would make the 2000 tech bust look tame in comparison.
Even if the market cools in only those parts of the country that Federal Reserve Chairman Alan Greenspan describes as "frothy," the U.S. has a serious problem.
If prices were merely to level off, it could subdue the property-linked activity that has stimulated spending and job growth -- crucial supports for the U.S. economy.
Based on benchmarks from a recent International Monetary Fund study comparing the stock and housing market bubbles, there are about 15 markets that are vulnerable to a housing market correction. These represent about 35 percent of gross domestic product, the broadest measure of the nation's economy.
"A significant correction in consumption spending in these states is bound to have significant effects on national growth," said Thomas Helbling, an economist at the IMF in Washington.
Merrill Lynch estimates the impact on growth could be as much as one percentage point of gross domestic product.
Add the knock-on effects to the rest of the economy to any initial spending hit and the situation looks worse.
The IMF study found that while stock market collapses are more frequent, housing busts do a lot more damage.
"The output loss associated with the typical housing price bust (about 8 percent of GDP) was twice as large as that associated with a typical equity price bust," the study said. . . .
American households have enjoyed a $4 trillion rise in wealth, thanks to a 40 percent gain in house prices since early 2001, according to Merrill Lynch.
Assuming they spend 6 cents of every extra dollar, this adds up to $50 billion in additional spending each year, contributing about half a percentage point to annual GDP since 2000.
"If home prices just level off, this could slice a full percentage point from GDP growth in 2006," Merrill said."
http://money.cnn.com/2005/07/01/real...reut/index.htm