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Friday, August 26, 2005

Dr. Leamer: Housing Has Peaked, Recession in '06

by Calculated Risk on 8/26/2005 05:20:00 PM

From an interview with FoxNews, Dr. Leamer Director of UCLA Anderson Forecast:

... the housing market appears to have peaked "in California and elsewhere. It will take more than a year for this weakness to turn into job losses and to affect the economy in general.
Dr. Leamer believes the housing slow down will lead to a recession and will be felt everywhere:
And contrary to what a lot of so-called "experts" are predicting, Leamer, believes the pain will be felt on a national level, not just locally. As an economist he’s much more concerned about the broader implications of a slowdown in the housing market than about the price bubbles some areas are experiencing.

"We’ve had ten economic downturns since World War II and eight of them started in the housing sector. It’s the first component of gross domestic product that starts to weaken," says Leamer. He keeps a close eye on what consumers spend on housing because it has a ripple effect, pointing out that a decline will lead to layoffs in construction, banking, and the real estate industry, to name just a few areas.
And its not just housing - Dr. Leamer is concerned about the auto industry too:
Leamer lays the blame squarely on the Federal Reserve for leaving interest rates too low for too long. Now, he says, we’re not only heading for trouble in the housing sector, but in the auto industry — another market that got drunk on historically low rates.

Low borrowing costs accelerated future sales by enticing consumers to trade up to bigger homes and new vehicles sooner than they might have done otherwise. ... As a result, car dealers lose the sale they would have gotten two years from now.

As rates creep higher, consumers happily driving their new cars or living in their larger homes have no motivation to purchase additional ones. Since consumer spending drives two-thirds of our economy, when consumers close their wallets, the impact is far-reaching.

While the real estate bubble itself may be all about "location, location, location," in Leamer’s view the coming housing slowdown will have national implications, although areas that have benefited most from the housing boom are likely to be hit hardest. For example, Southern California, where Leamer lives. He says the strong housing market "created a lot of jobs — in construction, in banking, in real estate. If that disappears, a basic driver for the local economy disappears." ...
Leamer's advice:

If you’ve been shopping for a home, Leamer says you "need to recognize the risk and do some hard-nosed thinking" ... he suggests you add up all the monthly costs and benefits (such as tax deductions) of owning versus renting. If buying still makes sense, his advice is: "Think long term — seven to 10 years. Avoid adjustable rate mortgages. Lock in a low, fixed interest rate." ... "If you’re not sure you’re going to be living in the home in two to three years, don’t buy it."