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

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Classic American liberal

You would love that in about 2007......right?

But for now, the economy is doing quite well, isn't it?

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"This is a time for a national imperative not to fail in Iraq." Condoleeza Rice, January 11, 2007

It's been quite a while since I had Econmics 101, but for every home seller isn't there a home buyer?

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Order without liberty and liberty without order are equally destructive. - Theodore Roosevelt

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Remember: The glass is always half empty. (at least until a liberal is elected...)

Unlike the dot.com bubble, the housing market may decrease (slightly), but it can't burst since the properties still have value. Perhaps instead of increasing in value, houses begin to decrease slightly. That is the worst that can happen, and since God ain't making any new land, it seems unlikely that the value of land can decrease that much.

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"George W. Bush surrounds himself with smart people the way a hole surrounds itself with a donut." —Dennis Miller

There isn't always a buyer if theres a seller.
For example would you purchase something that will be worth less in the future? And to finance this you will require to go into debt?

For housing the danger comes from point been reached of a glut in the market.
The only people who matter are those with capital, all others are irrelevant.
Everyone wants property but only those with capital can afford it.
Some of that is based on equity. And the vast majority based on debt.
When a fall starts to occur on house prices those who borrowed cannot sell for the loss, or if they become unable to fulfill their debt repayments then the bank reposssess the house.

PJ your incorrect in that assessment. Housing crashes do occur, property has no inherent value, it has value because we give it value. There rare crashes and I doubt the US will have one.
But the only thing that can really cause one is when a downturn hits the banks cut of credit.
This shakes confidence more further reducing prices.

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"Better to die on you feet than live on your knees" - Emilio Zapata

Alan Greenspan was a Republican - though the Fed (and Greenspan) has done a good job of remaining fairly apolitical. While fiscal policy issues are playing into the housing boom/bust concern, the Fed will be the first to react, with monetary policy changes. In fact, the Fed is already reacting to this and other monetary concerns. Not everything comes down to Repub vs. Dem, or liberal vs. conservative. I know the board would empty out without those playground antics, but still...

People are doing some crazy and idiotic things right now. Some are doing it to just get in a place to live (that they can call their own). Others are playing real estate investor (speculator) on the side... making one or two flip deals that nets them $80K or 90K in a few months and believing that next year they'll be challenging Mort Zuckerman for his NY empire. Those (moronic) people are helping to inflate the real estate market, just as the Mike Milken wannabes, who chased phantom companies with no earnings, helped to inflate the NASDAQ in the mid-to-late 90's.

What some people are concerned about are the interest only, low/no doc and non-conforming mortgages that are beginning to show up all too often. These high risk borrowers are the ones most likely to walk away and cause problems in the banking sector. The speculators and flippers are another concern. In their case, I think it'll be more a case of easy come, easily gone. The smart ones will leave the tables before the dealers start taking their money back.

But I think this will be more of a regional thing than a broad based problem. It's the medicine that the Fed might dole out that concerns me - that could be broad based.

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"Tweeter was a Boyscout before she went to Vietnam and found out the hard way... nobody gives a d@mn."

I wonder if all the dot-com money that people made on their nasdaq shares have been pumped into the housing market. (yes people, some people sold their nasdaq stock before the big fall, netting them tens of millions) .

Unlike the tech boom, which actually did uncover new technology and create spin off companies & jobs , property does NOTHING else to the economy, once the house is built thats it. If people are re-investing in property , it wont be long before the whole economy is trading properties to each other (thats ridiculous, though if banks are eager to lend, this situation could last until the banks say no) .

There's quite a few TV shows about the property ladder and property game. Joe Blow sees his house double in value, thinks I might buy a house in Spain or Florida. However Joe needs to sell onto someone else, if no one else is buying...

the proprty market is a pain in the whole for someone like me who is startingout, with no equity. I'm thinking of moving to a county with cheap property to avoid having to pay the vastly inflated house prices. the Irish economy is being propped up by debt spending.

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If they continue to rise (as expected) it will eventually choke off some demand in the housing market. Lower demand equals lower prices. Areas where property values have really skyrocketed will suffer the largest effects. Bubbles always burst. Then they re-fill with air again.

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Where are we going? And why am I in this handbasket?

Property has "no inherent value?" While stocks can evaporate when the company it symbolizes goes out of business, land can't. Land can decrease in value, but it can't evaporate.

A lot of people held stock certificates that were nothing more than worthless peices of paper when the dot.coms busted. If the housing market "busted," no one would consider anyone's deed worthless.

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"George W. Bush surrounds himself with smart people the way a hole surrounds itself with a donut." —Dennis Miller