Housing slump fuels crash fear


The downturn in the US housing market will force businesses to slash 73,000 jobs a month in the new year and could be more damaging to the world economy than the dotcom crash...


The downturn in the US housing market will force businesses to slash 73,000 jobs a month in the new year and could be more damaging to the world economy than the dotcom crash, economists have warned.

After official figures last week showed that the number of new homes sold in July was 22 per cent lower than a year earlier, while prices were almost flat, fears are mounting that the ‘orderly’ housing slowdown predicted by the Federal Reserve will become a full-blown crash.

‘Things do seem to be getting worse very quickly. Freefall is a strong word, but I think it’s the right one to use here,’ said Paul Ashworth, chief US economist at Capital Economics.

House prices have been rising at unprecedented double-digit rates in recent years, giving homeowners massive windfalls and supporting a wave of investment in new construction. However, the number of unsold new homes is now at a 10-year high.

Stephen Roach, chief economist at Morgan Stanley, predicts that the property slowdown will shave at least 2 percentage points off GDP growth next year, taking the US perilously close to recession, as construction spending plummets and homeowners lose the cushion of extra wealth that comes from rapid price rises.

‘For a wealth-dependent US economy, the bursting of another major asset bubble is likely to be a very big deal,’ he said, warning that, with US fiscal and trade imbalances now larger than five years ago, the fallout for the rest of the world could be more devastating than the aftermath of the dotcom boom. ‘A bursting of the property bubble poses equally serious risks for America’s key trading partners and for the rest of an increasingly integrated global economy,’ he added.

Rarely, has the percentage of homes built in the U.S. on spec ever exceeded single-digits — until recent years of low interest rates. Now, that number runs up to 20-30%. If you’re looking at the niche of $1 million homes and up, 50% is not an unusual number.

Gonna make a hell of a noise if and when the bottom drops out of the market!

Posted: Sun - August 27, 2006 at 05:37 AM