The red-hot housing market will slow later this year, hurting U.S. economic growth, but not pushing the nation into recession, at least in the near term, economists at the UCLA Anderson Forecast said Tuesday.
In their quarterly forecast, UCLA economists predict slower economic growth through 2006, though saying there is virtually zero chance of a recession before April 2006, the end of their forecast window. But they add that a drop in spending on homes has been a major part of nine out of 10 downturns since World War II.
"It thus seems highly unlikely that the U.S. will be able to avoid an 11th recession in which housing plays a major role. We just don't know when," Forecast Director Edward Leamer said in the report.
Leamer added that "later is not necessarily better" for a correction in the housing market, as each month of higher prices increases the size of the adjustment ahead.
The UCLA analysis predicts housing starts, now running about 2 million units annually, are outpacing demand and will start to decline late this year, slowing to a 1.6 million rate by the middle of 2006. U.S. economic growth, 3.5% on an annual basis in the first quarter of 2005, is expected to fall to about the 1.5% range by mid-2006.
If interest rates were to spike or home prices plunge, the slowdown could be greater, the report said.
The record housing market has helped propel the economy since the 2001 recession, as consumers have bought houses in record number or borrowed against the increased value of their homes. But the UCLA economists don't see home equity or income gains strong enough to provide a big boost to spending ahead. Higher business spending or stronger exports aren't expected to take up the slack.
The UCLA economists are among a growing chorus warning that the housing market is due for a slowdown or correction. Prices have soared in cities on the East and West coasts, rising 100% in California in the past five years and 80% in Florida and Hawaii. To keep up with higher prices, consumers have been using non-traditional financing such as 100% loans or interest-only mortgages, on which they pay no principal for a set period of time.
In Washington on Tuesday, Federal Reserve Governor Mark Olson said the central bank is concerned.
"Clearly, there are some markets where the increase in valuation is unsustainable," Olson said after a Senate hearing, Reuters reported.
Existing home sales figures for May, to be released Thursday, are expected to show large gains.
Steven Wood of financial services firm Insight Economics said the overvalued housing market is affecting about 60% of the USA. In a report this week, he said prices don't have to fall to significantly affect the economy. In 2004, homeowners extracted $750 billion of home equity, helping spending. That will slow if prices stop rising.
What they would do in this situation is short sell the home. Sell it at current value and walk away. Of course the banks would be stuck holding the bag, and the entire mortgage interest rate markets would see a sharp increase.
This is in my opion coming - sooner or later we are going to see rates back in the 7-8% just like the good old days.
Not always true - if you miss a mortgage payment, a single mortgage payment - you are considered a risk, and most invetors will not look at you for a new purchase or refinance. You would have to go to alternative lending to get a new loan if you have been over 30 days late on a mortgage.
After 3 missed payments, you are at risk of loosing your home.
Interesting, I have never heard of banks renting out residential homes. At least not in my part of the country - I always wondered why they don't. THey just get the defaulted home - sit on it or try to re-market it. Most of the time they end up with a short sale and either break even or loose in the process.
Indeed H-man, leeks should be plugged.
In all seriousness, this whole discussion confirms the notion that all investments are not for everyone. The poster who advises buying real estate with cash should stay far away. Bad stock pickers or those who do not wish to exert the effort should buy (the few) well-run mutual funds or BRK. I still like debt, which is how I got into RE in the first place. To each his own.
"What about property taxes, and repairs? what about the eventual 2 mos. vacancy? what about the time you spend to upkeep, manage it, etc.? Rentals need new paint, carpets, windows, plumbing, etc."
3/1 houses in the quality neighborhoods of the Inland Empire of So Cal are going for $415,000. So, the yield is a little bit less.
The property is depreciated. The depreciation shelters the rent and makes the income tax free. Therefore, the yield is equivalent to a taxable yield on the order of 6 percent. Property taxes do knock that down, but they are also tax deductible. Typically, rentals are not treated to a lot of upgrades, and if the property is in good condition maintenance costs are not high.
I'm not suggesting that everyone leap into rental houses. My point is simply that in the current low-interest investment environment housing prices are not manic or irrational.