Tuesday, September 05, 2006

A Tooth-Rattling Plunge?

From the IHT/NY Times:

America's housing slump

With economic signals flashing that America's housing boom is over, speculation has now turned to how deep the slump will be and how long it will last, with predictions ranging from a smooth descent to a tooth-rattling plunge. Come what may, conventional wisdom holds that as long as you don't plan to sell your house any time soon, you'll be all right. The downturn is unlikely to wipe out all of your accumulated gains - the thinking goes - so you can cash in later.

Or can you?

The downturn in housing is overlapping with the retirement of the baby-boom generation, which starts officially in 2008, when the first of 77 million boomers become eligible for Social Security. Most of them are homeowners, and many of them will presumably want to sell their homes, extracting some cash for retirement in the process. Theoretically, that implies a glut of houses for sale, which would surely mitigate an upturn in prices, and could drive them ever lower. The result would be less housing wealth for everyone and less to live on for those who had planned to retire on the house.

Still, no one can be sure what will happen. Economists agree that the retirement of the baby-boom generation will influence housing prices, but differ over how powerful the effect will be. But one thing is reasonably certain. The question would not be such a burning one if Americans, especially those near retirement, had adequate savings to see them through. Even before the personal savings rate went negative last year, Americans were meager savers.

The housing bust may be what it takes to reverse that. Even a shift from profligacy to thrift would not be entirely good news, however. For an economy based on consumption, the change to less free-spending ways could be excruciating.

The house party is over, but Americans don't yet know how bad the hangover is going to be.


Anonymous Anonymous said...

Home Prices Show Sharp Slowdown in 2Q
Tuesday September 5, 11:13 am ET
Home Prices Across the Country Show Sharp Slowdown in 2nd Quarter, Report Shows

WASHINGTON (AP) -- U.S. home prices continued to rise in the second quarter but showed the biggest slowdown in three decades, federal regulators reported Tuesday.
The figures released by the Office of Federal Housing Enterprise Oversight, the agency that oversees the big mortgage-finance companies Fannie Mae and Freddie Mac, provided the latest indication that the housing market is cooling substantially.

Average home prices rose 1.17 percent in the April-June period, compared with 3.65 percent in the second quarter of 2005 -- the biggest decline in price growth since OFHEO started keeping track of home prices in 1975, the new report showed.

The agency cited higher interest rates and rising inventories of homes for sale as possible factors in the slowdown in price growth.

9/05/2006 10:50:00 AM  
Blogger skep-tic said...

this is why the pain will not be over in a matter of months, as many bulls hope.

we are coming to the end of a basically 25+ yr uninterrupted bull market in RE. the downturn in the early 90s was a blip on the screen compared to the overwhelming upward surge of the past 3 decades (similar to the trend in equities)

the obvious trend going forward is for baby boomers to liquidate their assets, whatever their form, so that they can do what they do best-- CONSUME.

9/05/2006 04:09:00 PM  
Blogger skep-tic said...

Calculated Risk has a good analysis on demographic trends:

"During the best decade for adding housing units (the '70s because of changes in household sizes) the U.S. added 1.97 million units per year. Last year, the same number of units were added, even though the demographics appear less favorable for housing (household sizes are fairly stable)"

9/05/2006 04:24:00 PM  

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