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!
They raise interest rates 17 times so anybody could see this coming. Homebuilders reportedly have been offering freebies, such as whirlpool tubs. They just aren’t building affordable housing stock and the luxury marketing is near collapse. If you build homes that people can afford, people can afford them. In our area, most if not all new housing is luxury high end housing. The airlines have created a large supply of older housing and luxury housing for the most part, in our area through downsizing and relocations. The housing supply here is much greater than the demand. The cooler market should bring prices down, so this is good news.
a few observations –
there are also the intangible effects of a housing value slide. once people realize they are basically stuck in a house that they can’t sell, except at a loss, they start to feel less well off and may curb spending. since consumer spending is the backbone of the economy, that is no good.
also, it used to be that housing was an asset you lived in, rather than one you depended upon for income. thus, even if value declined, there was no pressure to sell and get your money out while you could. however, some huge percentage of the new housing stock was purchased for investment, rather than residential, purposes. these are the people who could be panic-selling, trying to get their investment out, and driving the market even lower.
three – location, location, location. housing is not fungible. it is likely that, rather than one dot-com type burst, there will be numerous local bursts, spread out over time, and some housing markets will remain healthy, simply because of local market conditions
The sky is falling. The sky is falling.
I’m not knocking posting this story, since it’s an important news topic, but I am tired of hearing this story reported as a national story.
There are numerous markets where there is no bubble, and traditionally housing bubbles are only do to local economics. Trying to tie these local conditions to national economics just doesn’t work.
#3, if economists believe that a decline in US housing would contribute to a WORLD recession, I’d say that it is a national issue. Things are so interconnected that I think it’d have to become a national issue. If people and businesses aren’t buying your products and services across the country/world, it will affect your region, regardless of the local housing conditions. Falling sales/profits due to economic slowdown resulting from housing slowdowns elsewhere in the country will force job cuts wherever that business happens to be located, which will affect the housing market of that company locally in one way or another.
I think it’s a national issue.
Our bubble popped early. We blew our load and have plenty of bedrooms empty here. We have lost population for years and the new housing keeps going up where the trees once lived. We even have new commercial building about six miles from the half empty downtown business district. Close enough to drive, just a bit too far to walk-gas station in the middle suburbia dreamscape. The bottom fell out in different spots around here, so the slumlords picked up the pieces here and there. That 4 bedroom, two bath colonial is now that duplex with on street parking at $550.00 a month plus gas and electric and everything. They are all over the place. He’s a lawyer, she’s an agent and they run a property management firm on the side, just call them if you need anything. The whole town is renting and half the town is out of work. Walmart is coming in, so it should all be looking up once we land those $7.50 an hour jobs and kill anything that looks like a local business. We need new eateries!
1. WHAT this WORLD economy stuff.. This is in the USA only..
2. IT AINT the interest rates.
3. If they would DROP the cost of wood products by about 25%, it would make it easyier to Build a house for a decent price. MOSt of its imported from Canada anyway, at a VERY LOW price. Cut those profit margins, and we can go BANG insted of BUST.
Uncle Jim, thats how it is in NJ too. New construction is either age restricted, luxury condos/townhouses, and 5 bedroom, 4 bath mini mansions. The people who listened to all the get rich quick talk in realstate are in for rude awakening when the houses that they over paid for in the first place are sitting on the market, unsold.
Also blame “interest-only” loans.
WHAT this WORLD economy stuff.. This is in the USA only..
Read “Eurozone cannot decouple from US recession” for why this matters to the rest of the world.
Does this mean I can quit living in my car?
ECA — you’re 180º from the facts. Canadian softwood producers have been decimated over the past 5 years by the Bush government’s 25% tariff. Judged illegal time and again, he refused to accede to court judgements. [No surprise].
Finally, he’s offered 80¢ on the dollar towards the $5 billion settlement. Harper — is willing to make the issue a vote of confidence in Parliament and give back $1 billion to the U.S. to restart trade. We’ll find out what happens in the next few weeks. Of course, this may all be a moot point — real soon now.
The folks who bought “prestige” homes with upside down mortgages with both Mom and Dad working two full time jobs a piece just to make interest payments are the ones going to get it in the neck. I cannot find in my heart any pity for these people, anyone who skips over life’s basics for a fancy mailing address and a Navigator or two in the driveway pretty well deserve what they get.
Of course, if you have a pile of real money working to produce passive income that keeps the coffers full then go for it. But these wannabe rich folk that want to flash the symbols without much more than one of those rather pathetic interest bearing checking accounts are heading for disaster, all the time bragging on how good their doing.
Great choice of graphic…
“Not affiliated with Mr Internet Bubble.” 🙂
I’m not going to shed a tear for people with thier get rich quick ideas. all these people inflated the prices of homes in order to get rich quick priceing out people that you would want to live in these communities (cops, firemen, doctors). banks will collaspe, and a new depression will hit our age
11,
so THATS where that 25% came from…
We sell our lumber to china at major profit,
Import Canadian lumber to sell to our OWN, and foist a 25% tarriff ON TOP…
15, you are a FOOl…
I think if the builders would build homes designed to actually last longer than the warranty and not the thrown up pieces of crap they have been putting up for the lat 10 years people might not have decided that their money is better spent elswhere than a house built like a ford
18,
The COSt of a house is directly from the COST of the products to BUILD IT…
Its not just the Wood, or the electrical wires, or the Tile, or the Carpet, or the plumbing…Its ALL of it..
ALL these prices have gone up for NO, or little reason EXCEPT profit.
99% of all our goods are coming in from foriegn countries…AND we are selling them OUR metals, and our WOODS, and the costs come from SHIPPING back and forth…
Word: it’ll be a buyers market once sanity prevails, and home prices drop to reasonable levels.
Mabye people will buy houses for a better reason: to have a place to live for a long time, instead of looking at a house as a profit center.
I guess I endorse your “smaller is better” comment, Bryan. Though lifestyle has a lot to do with it, too.
In much younger days, when a few friends and I managed a traditional Salon on weekend — with up to 500 people passing through — I rented a 3-story Victorian house. 6000 sq.ft..
Nowadays, my wife and I live in a family-built traditional hacienda. The 2 of us and 2 dogs in 1200 sq.ft.. Other side of courtyard is a 600 sq.ft. guest house divided to hold 2 sets of visitors. The other 2 sides of the rectangle bounding the courtyard are a garage and a small workshop.
But, a 2½ acre lot, mostly prairie meadow. That was central to the choice.
I live in Northern VA, and I can attest to the fact that NO new homes are being built with less than 4 bedrooms, and a new townhouse will set you back $350,000 at the low end. It is completely insane. This has been directly fueled by the low interest rates of the past 5 years, as well as the insane lending schemes that buyers have been gobbling up. It’s sad, though, to some of these families in their nice new homes with no furniture in them because they can’t afford to buy any.
The result is that the area is becoming completely over-developed, and there is now a surplus of homes to go with the terrible traffic.
This administration irresponsibly wrung out every bit of slack out of this economy with extremely low interest rates for so long causing inflation to rise, lax business controls on Wall Street corruption, low quality financing offerings which allowed people to get in over their heads, free-for-all with America’s credit card, reducing us to a service only economy by outsourcing the manufacturing, etc. All to live high on the hog for a short term and ignoring the reality of the long term effects. It was obvious from the beginning that this was foolishiness but like anyone having fun at a party, the repercussions of a hangover or car crash are too negative and “buzz-killing” to be addressed/mitigated before all hell breaks loose. I feel no remorse for the fools who got caught up in the hype like those that bought a house for $400k that was previously $100k a few years ago with some new minor remodeling. You want to play the game then be willing to deal with the pain.
if economists believe that a decline in US housing would contribute to a WORLD recession, I’d say that it is a national issue.
I’ve yet to hear this from a number of sources, and until I do it stays in the “idle speculation” pile of news.
As for the world economy, who cares? Our nation’s ability to screw with other nations’ economies, while they can’t touch ours, is our biggest power going.
I agree with all of the “don’t buy something you can’t afford comments”, and disagree with comments about the economy being mismanaged: they’ve been jacking up rates, if you haven’t noticed.
This whole talk of a bubble is meaningless, unless you get your financial news from the tabloids.
Or, if you paid $950,000 for a Toll Brothers home that has a sane market value of $450,000. Plenty of people losing sleep over this issue.
I have no sympathy for those idiots. This isn’t stealing from the poor, its stealing from upwardly mobile yuppies.
And really, if you’re dumb enough to pay double for a house then you’re not reading the news… you’re reading the “Life” section of the paper.
Our nation is at the mercy of its creditors right now. We can stomp on Thailand or Ecuador, but China, Japan, and Saudi Arabia have some very real leverage over our economy by investing in Euros instead.
Proof? Our creditors know they aren’t in a position to force collection, and that we’re “good for it”. The idea that we’re not in control can’t be backed up.
I’m looking forward to it busting and having housing prices fall back inline with incomes. When a $100,000 home is selling for $300,000 you know there is a problem. Wages have been relatively unchanged the last 20 years, yet housing is several times higher. Anybody who doesn’t expect that to correct itself eventually is deluding themselves.
I am personally looking forward to having the opportunity to purchase my first home when the prices become sane again.
We should also remember to hold the real estate agents and “land barons” accountable. They should not be selling homes for more than they are worth just to line their pockets.
The other contributor to this problem that I haven’t heard mentioned is the emmigration from higher cost areas (like California) to lower cost areas like Oregon and Idaho. These people sell their million dollar condos and move to the sticks and the real estate agents sell them on a “cheap” home at $300,000, that is really only a $100,000 home. The prices get driven up, the locals can no longer afford to own a home, and the whole situation gets really bad.
22,
Im sorry to say…
But, I was raised on the Habbit of BEING NICE TO PEOPLE…
I DONT change 16 times, for what took me 1 to do.
I WOULDNT charge you $45 an hour when I have a KID working at $10-12 an hour DO THE JOB…(this is a rural area).
I wouldnt CHARGE you for an OIL change you DONT NEED…
People want a HOME, NOt an apartment.
the standard goes like this…Yoiu NEED enough room to GET AWAY from each other, if you HAVE to. NOT a Little shack you cant swing a CAT in…You want something you CAN raise a family in, with ENOUGH room to expand IF you want/need. someplace for your Car, tools, and HOBBIES, and not spend a fortune, and then ADD taxes to, that Bankrupt you the REST of your life.
Profit margins are TO HIGH.
Share and share alike, is commie…
being Nice to each other is commie…
charging a 10%-20 over cost of manufactour is commie…
Then Why cant I buy wholesale…? its NOT against the law…but they wont sell to me. Do they want ALL the people down the line to get their 10% each time it trades hands?? I dont want to PAY it…and Neither do 60% of america..
Then Why cant I buy wholesale…?
Simple. Economics. The cost of preparing the sale is the same for one item as it is for 100 items. When you want to buy 100 items, come see me. Until then, go see a retailer.
BUT I WANT THE 100…
I need siding for my HOUSE…I need almost 1/2, and can sell the rest at CUT-RATE
#36, can you? If you could, then you would be a retailer. With any business also goes the costs.
Where will you store the siding while waiting for customers? Is it even zoned for retail?
How will you transport it to the customer’s site or from the manufacturer’s site?
How will you load / unload the siding?
Will you keep several different types, styles, and colors available?
What about payments, will you set up a credit card account for your customers, extend them credit?
Will you get someone to do the books or do everything yourself? Who will do the taxes?
What about the distributor that bought an exclusive region from the manufacturer?
As you can guess, none of these things are freely done. They all add to the cost of doing business. So sure, you want to avoid paying all these costs, maybe you can suggest who should pay.