As The Economist reported, houses are not just places to live in, they are more important for whole economies. Thus, the housing sector in the US has been playing a vital role in the country's economic growth and employment. The five years of prolonged housing bull market has helped the US economy to combat other ill effects of the economy and helping consumers feel rich. Consequently, the US saving rate has plunged and consumer spending surged as homeowners borrow against their asset gains. However, now the debate is more about the consequences of housing price slump and its implications on the economy. Though economists ruled out any recession in the near future, the pessimists expect that the recession is inevitable if the prices fall further.
According to the Office of Federal Housing Enterprise Oversight (OFHEO), the average price of a house rose by only 1.2% in the second quarter, the smallest gain since 1999. National Association of Realtors (NAR) showed a rise of only 0.9% in the year up to July. New home sales are down 17% from a year ago, while sales of existing homes have slumped 12%. Median price for existing homes fell by 1.7% in the year to August, the first such national drop since 1993. The median price of new houses fell by 1.3%. Paul Ferley, Assistant Chief Economist, Economics Department, BMO Financial Group says, "Sale prices for existing and new homes are clearly turning down with the year-over-year growth rates for both measures turning negative in August of 2006. This compares to recent peaks of double-digit gains at the start of this year (for existing home sales) and the fall of last year (for new home sales). However, the earlier run-up in prices occurred at a time when housing affordability remained at historically attractive levels. This suggested that favorable economic fundamentals were fueling much of the price gains rather than speculative activity."
The price rise varies across the US. For instance, prices have been double in the past five years in California, Nevada, Hawaii and Florida. However, prices increased by one-third in some parts of the south and the Great Plains. These high price regions have accounted for one-third of the housing wealth in the US, any price slump will take a bite out of the country's wealth. Ferley opines, "Affordability has started to deteriorate recently in the face of rising mortgage rates, which has contributed to the downward pressure on housing prices. However, with strong economic fundamentals rather than speculative activity explaining most of the earlier price gains, a correction in house prices rather than a collapse is more likely to occur."
The housing boom has been the main engine of America's economic growth in recent years. Even though, the rise in the real wages is low, the rising asset prices helped the Americans to spend more and allowed them lend against their homes. According to the estimates, if the present housing bull-run is blocked, it will be the biggest bubble in the US history to burst. In real terms, home prices have been raised at least three times as much as any previous housing booms. Over the past five years, the total value of the US homes has increased by more than $9 tn to $22 tn. These gains have offset both the slide in the share prices and lower wage growth. According to Merrill Lynch, construction, spending and lending have accounted for more than half of the total GDP growth of the US last year. Besides, the housing boom has also been responsible for one-third of all jobs created since 2001. On the other hand, much of the macroeconomic impact is yet to be felt. The most direct and least debated effect is the impact of builder's cutback on overall output. Given the plunge in new home and builder's gloom, residential investment is probably falling by around 15-20% annually and is likely to stay for the next few quarters. |
