Housing Cools Down

Gary Evans, Don Hogsett, December 19, 2005

Los Angeles — The big American housing market, a major prop to the domestic economy over the past three years, may finally be heading into a long anticipated downturn, leading to widespread job losses and a hit to the U.S. economy, said UCLA economists in their widely watched quarterly Anderson Forecast.

Hobbled by slowing population growth and rising mortgage interest rates, “there are some signs of late that housing activity is starting to head lower,” said the report prepared by economists at UCLA's Anderson School of Management. Both home sales and mortgage applications have declined recently, and home builders are growing more guarded in their forecasts, said the UCLA report. At the same time, the stock market has begun to markdown shares of various home builders.

“Sustained declines or not, it is clear that all of the growth in housing construction has evaporated over the last two years,” said the report's authors. “After boosting GDP growth by nearly a full percentage point in late 2003 and early 2004, housing is barely contributing anything to economic growth at present.”

A slowdown may be long overdue, said the report. Housing activity has been rising for 14 years, while past housing expansions “typically stalled out after four years.” Acting as a drag, “population growth has been slowing for the last few years and is set to slow further in the years ahead.” Additionally, said the report, “interest rates hit bottom two years ago and have headed up since, while the 2001-2003 tax cuts are fully two years in the past. Both fiscal and monetary stimuli had their full effects on housing quite some time ago, and those factors are working to restrain housing activity at present. Furthermore, our reading of the demographics suggests that home construction is above sustainable rates. Finally, there is evidence in a number of regional markets of outright 'bubble' market conditions. On all these grounds, we believe housing is due for a sustained decline.”

When the housing slowdown hits full force, said the report, it could cost the economy as many as 800,000 jobs, in construction and finance. Furthermore, the report noted, “eight of the last ten recessions got started in the housing sector.” This time, though, the housing slowdown is unlikely to lead to recession, unless there are simultaneous and substantial job losses in the manufacturing sector of the economy and corresponding high unemployment levels, said the report. “It's a good thing that the construction cycle and the manufacturing cycle have become disconnected,” the report observes.

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