Thursday, August 24, 2006

Soft Landing or Crash?

Jessica Holzer of Forbes asks whether the red hot real estate market is heading for a crash. In general she says it seems to be heading for a soft (rather than crash) landing. Here is an excerpt from her article. For a full view of the article click on this blog title (or here).

Pessimists argue that a housing bust will dampen consumer spirits and spending power, raising the risk of recession.

There are several reasons to reject this gloomy view. For starters, the economy is in good shape to absorb a slump in housing. Businesses are spending briskly on capital goods, and exports are strong. Despite the U.S. Federal Reserve's recent rate-tightening, interest rates remain low by historical standards. In short, as housing cools, other booming sectors are likely to offset the effects of the slowdown.

"The economy's a lot more dynamic that people make it out to be," says Mark Vitner, a senior economist at Wachovia Securities in Charlotte.

There is also an upside to a slowdown in the housing market: It will make it far easier for the Fed to rein in rising inflation without further rate hikes, argues Steven Wieting, the leading economist for U.S. equities at Citigroup.

And unlike the tech bust of the late 1990s, which caught investors and business off-guard, a slump in housing has long been predicted.

"It's the channel in which you should expect the slowing in the economy to take place," Wieting says.

In any case, the housing market isn't in the dire straits that it might seem. While overheated markets on the coasts are cooling, home sales are picking up in places like Texas, Georgia and North Carolina. Meanwhile, investment is pouring into non-residential construction, which will help mitigate the slowdown in housing by soaking up workers in construction, architecture and other fields.

So far, consumer spending is holding up. "It is decelerating, but it's not falling out of bed," says Nariman Behravesh, the chief economist at Global Insight, an economic forecasting firm in Lexington, Mass.

Partly, this is because households have accumulated wealth that will support their spending as equity withdrawals slow. According to the Federal Reserve, household net worth excluding housing wealth or liabilities ballooned by $3.5 trillion in the past year.

"The consumer balance sheet is big and getting bigger in both directions, with both assets and liabilities going up," Wieting says.

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