Realities of supply and demand are poised to burst the housing bubble
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 firms have concurred. Said a Lehman Brothers report, "(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 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. That does not 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 a bubble burst would mean the loss of 5 million to 6.3 million jobs.
While there's disagreement on what a downturn will mean, it's 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, 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 only happened three other times in the postwar period, according to Merrill Lynch: 1971 to 1973, 1977 to 1978 and early 1984.