Thursday, August 25, 2005

Krugman: Housing Bubble will Burst

by Bill McBride on 8/25/2005 02:46:00 PM

Reuters quotes Dr. Krugman:

"I'll give you a forecast which might very well be wrong, but I think it will burst in the spring of next year," he said at a derivatives conference in Brazil's winter resort of Campos do Jordao.

"I would be surprised if it doesn't burst in the next three years," he added.
I think it will be sooner rather than later.

Krugman said skyrocketing U.S. housing prices were supported by large -- and somewhat "odd" -- capital inflows from emerging market countries, such as China, which has accumulated huge holdings of U.S. Treasury debt, helping keep long-term interest rates abnormally low.

"Americans pay for their houses with money they borrowed from the Chinese," he said.
An expected decline in U.S. housing investment would be part of an economic adjustment process which could include the weakening of the dollar, higher U.S. exports and the reduction of current account deficits in the world's largest economy, Krugman said.

"This is how we would like to see it happening -- smoothly -- but there are many moving parts and they're unlikely to move at the same time," he said. "So it's not going to happen unpainfully."