More on the US housing 'bubble'

I have written before on the US housing 'bubble', but there is plenty more to be said on this topic. For example, this week's BusinessWeek  cover story is After the Housing Boom: What the coming slowdown means for the economy - and you. Although they say that "2005 looks to be the year that housing finally cools off", their outlook is pretty sanguine:

Housing's slowdown will be relatively mild compared with past downturns, though there are pockets of froth. Why? It's taking place at a time when the economy is expected to grow by over 3.5%. In the past 40 years, national new-home prices have fallen only twice, and both times were during a recession. Besides the good job and income growth associated with a healthy economy, there are other compelling reasons that the market won't soften too much.

Baby boomers continue to fuel demand - especially for second homes - and immigrants are increasingly becoming first-time home buyers. Even so, the new reality will have a big impact on homeowners who have begun to look at 10% annual gains in home values as a birthright. Consumers who made a habit of tapping into their home equity will find that their home is no longer a personal ATM.

Meanwhile Calculated Risk, blogging at Angry Bear, is not quite so relaxed. Nonetheless, he makes a crucial point about the asymmetric nature of housing booms - something I've long argued. Namely, they usually don't 'burst', they deflate:

Housing "bubbles" typically do not "pop", rather prices deflate slowly in real terms, over several years. Historically real estate prices display strong persistence and are sticky downward. Sellers tend to want a price close to recent sales in their neighborhood, and buyers, sensing prices are declining, will wait for even lower prices.

This means real estate markets do not clear immediately, and what we usually observe is a drop in transaction volumes.

That means their adverse impact on the economy and business investment is likely to be less dramatic than, say, a stock market crash of 20-30 per cent in a matter of days. He has more to say here.

Comments

[Stephen Kirchner]

"...what we usually observe is a drop in transaction volumes."

Indeed. Take a look at the growth subtraction due to ownership transfer costs in the Australian national accounts in recent quarters!

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