How Bad Can US Housing Crisis Get?

You might be wondering just how bad can the US housing crisis get? The short answer is that it will probably be much worse than you now think.

The National Association of Homebuilders, as you might suspect, keeps a close eye on the nation’s economic trends. Home building is an important part of the US economy, accounting directly and indirectly for about 10% of all economic activity. The following is from one of the NAHB’s recent reports.

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The Economy Skates Close to Recession

GDP revisions for the fourth quarter of 2007 left the overall economic growth rate at a meager 0.6%, but the estimated contraction in residential fixed investment deepened to a 25.2% annual rate and RFI subtracted a whopping 1.25 percentage points from the GDP growth rate.

The housing contraction weighed on GDP growth from other directions as well, including the reeling housing finance system and components of retail sales closely related to housing market activity.

Available data, including housing starts and building permits for January and February, point toward another sharp contraction in RFI and another very weak GDP growth rate in the first quarter of this year, a pattern that skates dangerously close to recessionary conditions.

We now view a mild recession as a nearly even bet, but we also believe that aggressive actions by the Fed and the recently enacted economic stimulus package virtually guarantee stronger growth by the second half of the year.

To see more go to NAHB
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Note that the NAHB forecasters still take the common view that things will pick up in the second half of the year. Most economists, government leaders, and the average consumer is, in my opinion, still in denial as to how deep and prolonged this downturn will be.

For one thing the Bush administration is still in the Whitehouse. Why would anyone think that the same administration that has made such a mess in Iraq, could not deal with the reconstruction of New Orleans, is loaded from top to bottom with incompetent political hacks, and that never has been able to deal with reality, can deal with the worse downturn since the great depression.

For another , just as the bubble economy overshot the mark on the upside, the downturn will probably overshoot the mark to the downside. If history is any guide at all it only makes sense that one of the biggest bubbles ever created, the housing bubble, will take a long time to correct.

What most Realtors will not tell you, because most of them have a poor understanding of history, is that real estate can go down as well as up, and that the down cycles can last for a very long time. Japan is a good recent example. Real estate prices peaked there is 1989 and have fallen in many areas by up to 70%. While there has been some improvement over the past few years most real estate is still over 50% below 1989 prices.

Housing prices could easily fall another 25% to 30% during this downturn. The US is just entering a recession. Don’t expect a fast turnaround. The financial structure of banks, investment banks, brokerage firms, insurance companies, and mortgage lenders, are under great stress and will take many years to recover.

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