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Wednesday, May 11, 2005

"A Real Estate Concentric Economy"

by Calculated Risk on 5/11/2005 01:29:00 AM

Danielle DiMartino has been writing a series on the Real Estate bubble. In "A delicate question of policy" she writes:

If it really is dangerous to have all your eggs in one basket, we might be fried.

The Bank Credit Analyst research firm published three statistics on the housing industry this week that show how heavily the economy is leaning on the housing market.

•Real estate lending represents a record 53 percent of bank loans.

•Housing accounts for a record 29 percent of household assets.

•Residential real estate has captured 35 percent of private investment – the highest in 35 years.

"Housing has assumed a worryingly large role in the U.S. economy and financial system," the report concluded, "and it will be traumatic when the bubble bursts."

Doug Kass, the astute hedge fund manager of Seabreeze Partners, echoed the report: "There's no doubt we're in a real estate concentric economy."

"There is tremendous interest rate risk right now because of the abusive use of interest-only and adjustable-rate mortgages in the last few years," Mr. Kass said. "If we have to reset those mortgages at higher rates, it presents a huge risk to households' balance sheets."

His conclusion: "It's an accident waiting to happen."
DiMartino asks: "Just how widespread will the fallout be? More on that tomorrow."

I'll be waiting.