Since then, the market has made me wealthy. Spell compunded earnings :^)
Posted on 08/15/2005 6:00:40 PM PDT by ex-Texan
ISSUE BRIEF
1. The unprecedented rise in house prices has dangerous implications for the economy.The generalized bubble in housing prices is comparable to the bubble in stockprices in the late 1990s. The eventual collapse of the housing bubble will havean even larger impact than the collapse of the stock bubble, since housing wealth is far more evenly distributed than stock wealth.
2. The housing bubble has created more than $5 trillion in bubble wealth, the equivalent of $70,000 per average family offour.Through the post-war period 1950 to 1995, house prices grew atapproximately the same rate as the prices of other goods and services, like cars, gas, and health care. Since 1996, however, house prices have risen by morethan 45 percent after adjusting for inflation. This unprecedented run-up in house prices has generated more than $5 trillion in housing bubble wealth, which is the difference between the current market value of housing and the value if house prices had followed their historic trend and kept pace with inflation.
3. The increase in house prices is not being driven by fundamental factors in the housing market, such as incomeand population growth. The increase in home prices cannot be explained by fundamental factors, such as rising incomes and population growth. The growth in income over thisperiod has not been especially rapid. The rate of income growth is considerably slower than in the years from 1950 to 1973, when the rise in home prices just kept pace with the overall rate of inflation. The growth in population over this period has not been especially rapid. The most rapid growth in the number of new households actually took place in the 1970s and early 1980s, when the huge baby boom cohort was first forming their own households.
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5. The collapse of the housing bubble will throw the economy into a recession, and quite likely a severe recession. Housing construction is equal to approximately 5 percent of GDP. Construction of new homes has been going on at a near-record pace over the last few years, in response to the run-up in housing prices. Home construction could easily fall back 40 percent (this was the drop off in the 1981-82 recession), which would imply a direct loss in demand equal to 2 percentage points of GDP.
In addition, the large wealth effect associated with the housing bubble, which has spurred a consumption boom in the last few years, will go into reverse as housing prices plummet.
Research from the Federal Reserve Board shows that a dollar in additional housing wealth leads to 4 to 6 cents of annual consumption.
This implies that a loss of $5 trillion in housing wealth would lead to a decline in annual consumption of between $200 billion and $300 billion. This loss in consumption is equivalent to 1.6 to 2.5 percentage points of GDP. Combining the 2 percentage point drop in demand due to a falloff in housing construction with the 1.6 to 2.5 percentage point drop in demand due to the reversal of the housing bubble's wealth effect leads to a falloff in demand of between 3.6 and 4.5 percentage points of GDP.
If employment fell in the same proportion, this would imply the loss of between 5.0 million and 6.3 million jobs.
Since the federal government is already running a large deficit, and the country is running a very large trade deficit, the government's ability to use fiscal and monetary policy to boost the economy out of the recession will be severely restricted.
6. The collapse of the housing bubble is likely to put major strains on the financial system and require a federal bailout of the mortgage market. The collapse of the housing bubble is likely to lead to record levels of mortgage defaults. The ratio of home equity to home value stands at near-record lows, even though the run-up in home prices translates directly into additional equity. The reason for the low ratio of equity to value is that many homeowners have been quick to borrow against the new equity created by the housing bubble. This means that when home prices fall, many homeowners will find that their mortgages equal or exceed the value of their house, giving them a strong incentive to default on their mortgage and simply turn over their house to the mortgage holder. The market in mortgage-backed security currently exceeds $6 trillion.
The housing bubble collapse could lead to a loss of 3.6 to 4.5 percentage points of GDP due to a drop in housing construction and reversal of the bubble's wealth effect.
A very long and detailed report. Read All ? a Pdf file.
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Dean Baker is Co-Director of the Center for Economic and Policy Research
No kidding. Is that why I can't go for a sunday drive anymore without hitting traffic? Is that why every farm is now a development for homes I can't afford, and all the woods I grew up seeing are now replaced with shopping malls?
"Home construction could easily fall back 40 percent (this was the drop off in the 1981-82 recession), which would imply a direct loss in demand equal to 2 percentage points of GDP."
Good.
housing bubble, global warming, asbestos tainted breast milk, yada yada yada
The population is growing
The land mass isn't
Real Property is Real Wealth
Tax cuts increased real income and spending power
Tax cuts have lowered the deficit by $150 billion already
Enough people got burned in the [Clinton] Tech Bubble and learned their lessons
Purveyors of gloom and doom are heavily invested to "short" the markets, betting on self fulfilling prophecy.
All of the slow rabbits have been caught.
And so the real question is....
Is it time to sell your mortgage REIT stock or buy on the (every day falling) dips?
They left out the fact that the "collapsed stock market" has been over 10,000 DOW just about 100% of the time since then.
Some collapse.
The Baby Boomers legacy is in full swing. Everyone is a victim and everyone has the RIGHT to whatever it is he/she thinks is appropriate. Relativism is in full swing and all that WAS normal no longer is even palatable.
Victims...whiners...womb to the tomb leftists have permeated the MEDIA and the only thing worth reporting is ANYTHING that is NEGATIVE!!!
Her's what I have to say.........We are WINNING the WOT, we have prevented another attack on our nation for 4 years now. Our military has FREED 50 million people from BONDAGE, our deficit is DOWN, the ECONOMY is booming, unemployment is way down, the housing market is just fine, and we still pay less for a gallon of gas than any non arab country on earth and, based on inflation less than we did 30 years ago.
D&G's GO HOME and cry!!!
Doom and Gloom.
They forget to mention the primary driver in the housing boom, historically low interest rates. I don't believe there will be a bust, rather a slowing of the rate as interest rates continue to be raised buy the Fed.
That's the real tip of the iceberg. Counties and states are spending these increased taxes like they were carved in stone. When, not if, the downturn occurs, they will have to raise other taxes to make up for the loss. Increased taxes mean people can't spend as much as before and tighten their belts/quit buying. Down we go. How far and how long is the real question.
Between the burst bubble and the high gas prices, I see bad things 'a comin'.
Japan's problems went far deeper than any bubble.
Those factors still exist to a large extent, and aren't changing very much.
"I see bad things 'a comin'."
Could be good - " all things work for the best in the best of all possible worlds".
Yes, but the dollar dropped about 30% over that period in time, so your $10,000 Dow Index is only worth about $7,000 in 2000 dollars, and the Dow would have to be up around 14,000 to match its 2001 value.
Raising taxes doesn't work.
They will restrict programs rather than raise taxes.
Hell, here in Florida they can't raise taxes, and when those blue states try, we just have to buld more house for the refugees. - And there are a LOT.
Since then, the market has made me wealthy. Spell compunded earnings :^)
Oops! Compounded earnings. ;^)
Japan has two and half times more the trade surplus of China. The Japanese economic ministry has done a wonderful PR job in creating the image that the Japanese economy is in the tank because of China. It isn't! They are doing well because of good strategic planning. Japanese CEOs think longer term than American CEOs
The main reason house prices have risen is the low cost of mortgages.
And since no one knows for sure why mortgage rates are now so low,
No one can say mortgage rates will not one day, even one day soon, skyrocket.
And when those rates go up, down will go home prices--
And down every place where people take mortgages to buy houses.
There is another graph on my FR page that is worth looking at in case you're interested.
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