A Little Extreme, But a Good Read

Recently stumbled upon this article over at TheTrumpet.com (a religious publication from the Philadelphia Church of God): The Housing Bubble: Everybody's Talking. The article makes some great points but goes a bit overboard on the consequences. The article does a good job stressing some of the signs of a bubble:

"In California, interest-only loans accounted for 61 percent of new home mortgages in January and February—compared to less than 2 percent in 2002! A conventional 30-year fixed-rate mortgage for a median-priced home is out of reach for 82 percent of California households, even though interest rates remain very low by historical standards."

They also bring up some great points on the effect the housing bubble has had on the economy: "Since 2001, a whopping 43 percent of all net private sector jobs created have been in housing-related industries! Today, more than 60 percent of bank assets are tied to mortgages." Eep, that's some scary data. If the current state of the economy is tied as closely to the real estate market, as this article suggests, it makes one trepid as to what will happen to our national economy as well as the global economy when housing prices being their inevitible trek back down.

Armed with this information, the article's author argues that the housing bubble's bursting will spell hard financial times. "Prepare now to reduce your standard of living," the author warns at the article's end. To me that sounds a bit preachy and over the top, but then again I'm not one who's extended his standard of living based on the equity in his home. Such dire warnings may, indeed, ring true for those who have placed too much trust that the current trends will continue unabated.

Would it take a burst to impact the economy? No, says Merrill Lynch - even a slow down could spell trouble for the economy. From Even With No Bubble, Housing Could Be Trouble:

“The reality is, you do not need home prices to go down – all you need is for housing prices to stop going up,” said David Rosenberg, chief North American economist for Merrill Lynch. He calculates a flattening of housing prices could trim U.S. economic growth, currently running about 3.5 percent a year, by a full percentage point.

Rosenberg
Rosenberg figures that over the past five years rising home values have added $4 trillion to the nation’s net worth, or 70 percent of the total rise in household wealth in that time frame. That “wealth effect” probably has translated to about $50 billion in additional consumer spending a year, adding half-a-percentage point to growth every year.

“A lot of the economy’s fortunes hinge on the housing market, and yet it doesn’t look like it’s all that stable to me,” Rosenberg said. “The last leg has been fueled by a mountain of leverage and a lot of speculation.”