R1 SCMP US housing boom set to bust Jun 05

R1 SCMP US housing boom set to bust Jun 05 - Wednesday,...

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Unformatted text preview: Wednesday, June 22, 2005 South China Morning Post PROPERTY US housing boom set to bust As lending rates continue to climb, a collapse of the property market could send the American economy into recession Signs abound of a housing bubble that could pop and push the United States economy into recession, according to a quarterly report issued yesterday by the closely watched UCLA Anderson Forecast. Researchers forecast a soft landing for the economy as the housing market cools in the second half and weighs on consumer spending, but the risk of a recession increases if mortgage interest rates rise sharply and if new home sales sag. "We're getting closer to that point where the chickens are going to come home to roost," UCLA Anderson Forecast economist Michael Bazdarich said. "I didn't think there was a housing bubble two years ago, but there is a lot of evidence now the other way." The research group's director Edward Leamer wrote that the rise was setting up the economy for a hard fall: "Each month that goes by with higher levels of spending on homes, and higher prices of existing homes, we are building a larger mountain of adjustment-to-come." Researchers said it was not a matter of "if" the housing market would unwind, but of "when" and "how much" - and how much that would cost the economy. They saw almost no chance of a recession striking before April next year but said the economy was already running out of gas and would have little to sustain itself if housing were to slump. "We have modest growth right now," Mr Bazdarich said. "But it has been slowing steadily for the last year-and-a-half to two years ... we think it will slow further and probably intensify as housing peaks and drops off." After 4.4 per cent growth last year, the US economy will expand by 3.4 per cent this year and by 2.4 per cent next year, although some quarterly growth rates next year may be lower, Mr Bazdarich said. Additionally, he expects the national unemployment rate to slip to 5.2 per cent this year from 5.5 per cent last year, followed by a rise to 5.4 per cent next year. "Our forecast is predicated on a modest slowing in housing activity," Mr Bazdarich said. "I think it is fair to call this a `soft landing' scenario for the economy." However, if the low mortgage interest rates that have fuelled the housing boom suddenly rise, the economy would be in trouble, he said, adding that other industries linked to housing could be hurt. "Certainly, if mortgage rates were to rise sharply or if home prices were to plunge in reflection of a bursting housing bubble, that would be a death knell for the housing expansion, driving a more precipitous economic slowing than what we are forecasting," he said. Mr Leamer noted the next recession was "highly likely" to get its start in the housing market. Many analysts say it already has formed a bubble, while Federal Reserve chairman Alan Greenspan recently said there were only "signs of froth in some local markets". Mr Greenspan may be more concerned than he is saying, Mr Leamer said: "He is rhetorically edging to the conclusion that he has probably already made, which is that there is a problem in the housing sector." A drop in spending on homes has been a key factor in nine of 10 downturns since 1945, while spending on investments such as remodelling are at a record - about US$4,000 per worker per year, Mr Leamer noted. A retreat to US$3,000 per worker would translate into US$150 billion less in spending on homes, shaving about 1.4 per cent from gross domestic product, a level roughly equal to the decline in business spending on equipment that triggered the 2001 downturn, he noted. ...
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This note was uploaded on 09/06/2010 for the course FINA FINA0805 taught by Professor Tse during the Spring '09 term at HKU.

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