Monday, January 23, 2006

HSBC Economist: Housing Slowdown Could lead to US Recession

by Calculated Risk on 1/23/2006 08:48:00 PM

From a Financial Times article: Prospect of housing downturn casts pall over US economy

The ratio between average income and the costs associated with buying a home has risen to record levels. "Strong price growth momentum has resulted in very high prices relative to incomes across the country," says Ian Morris, chief US economist at HSBC.
Mr Morris says a "bubble zone" has been created where house prices are overvalued by 35-40 per cent, equivalent to $6,000bn. Although this bubble could take time to deflate, Mr Morris warns that "the consequences of a punctured housing bubble could be traumatic". Even a soft landing of zero house price growth, he says, will dry up the mortgage equity withdrawal that has fuelled consumer purchasing. Consumer spending makes up two-thirds of the US economy.

So could a bursting of the housing bubble pull the US economy into recession?

Mr Morris says yes. "If this adjustment can be managed over many years, the economy can avoid recession. If the process is squeezed into a shorter time-frame instead, then recession is probable."
The article offers other views too. The data later this week might be interesting.