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Alan Greenspan, chairman of the US Federal Reserve, has upped the ante. Having said in May that parts of the US housing market were looking frothy, last week he described the US housing boom as an “economic imbalance” and warned that prices, fuelled by “investors accepting lower compensation for risk”, could go into reverse. Basically, says Paul Krugman in The New York Times, he’s saying “beware the bursting bubble”.
The average US house price has risen by 50% over the past five years and some areas, such as California and Washington DC, have seen prices double since 1999; the benchmark OFHEO house price index has rocketed over the past two years. Merrill Lynch’s David Rosenberg reckons the ratio of house prices to incomes is far enough above the average to signify a bubble in 60% of the US, while, on the national scale, affordability for first-time buyers is at its lowest level since 1989.
Other signs of overheating are that property speculators accounted for 23% of home sales over the past year, while riskier forms of mortgage financing, such as adjustable rate mortgages, which increase exposure to interest rate hikes, have become increasingly popular. And lending standards have dropped: 42% of first-time buyers made no down payment last year, according to the National Association of Realtors.
The ramifications of a slide in house prices would be serious indeed, given that the sector has been a key driver of growth over the past few years. “Housing has been this giant locomotive driving just about everything,” says Rosenberg. Factoring in direct influences, such as housing-related jobs (40% of the jobs created since 2001), as well as indirect effects – such as consumption prompted by refinancing mortgages at a lower rate or borrowing against the value of a house – and the housing upturn has come to account for 50% of US GDP growth, he reckons. Even a flattening of house prices would be enough to reduce GDP growth by a full percentage point.
The “end of ever-higher prices” may now be on the cards, says Bill Fleckenstein on MSNMoney.com: the supply of homes on the market has reached a 17-year high. And the consequent slide in consumer spending, and hence the economy, bodes ill for stocks. Once the housing bubble bursts, we can expect the post-2000 bear market to resume
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Andrew Van Sickle
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