WASHINGTON -- Terrorism, energy prices and inflation.
Those are the top three near-term fears shared by leading U.S. economists, according to a survey released yesterday by the National Association of Business Economists.
A paltry 5 per cent of respondents expressed concern about excessive household debt. No one even bothered to mention a possible housing collapse.
It makes you wonder if those tall foreheads are looking at the same economy as the rest of us.
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The evidence is piling up that the once-soaring U.S. housing market appears headed for a crash. There is a spate of data from July suggesting that a housing bust is already here, including tumbling sales of new and existing homes, along with fields of unsold units. Prices are flat nationally, and down substantially in many key markets.
Toll Brothers Inc. -- the country's largest builder of McMansions -- said it's sufficiently sobered by what it sees that it's walking away from options on land where it had recently planned to build homes.
"It would be difficult to characterize the position of home builders as other than in a hard landing," Toll Brothers chief executive officer Robert Toll lamented to The Wall Street Journal. In 40 years in the business, it's never been this bad, complained Mr. Toll, 65.
"I've never seen a downturn in housing without a downturn in employment or some . . . macroeconomic nasty condition that took housing down with other elements of the economy," he said.
The conventional wisdom has long been that national housing markets don't crash, particularly when job growth is strong and interest rates remain at historically low levels. It has also long been assumed that housing markets don't drag major economies into recession, let alone global economies.
And yet most economists are still talking about a slump, rather than a crash, induced by the U.S. Federal Reserve Board's long rate-hike campaign.
Nouriel Roubini of Roubini Global Economics said many of his colleagues are missing the significance of what's going on in housing. "Calling it a slowdown or a slump is a misnomer," he wrote in a recent weblog. "Every possible indicator of the housing sector that has been coming out in the last few weeks . . . suggests that the housing market is in free fall."
Because the housing boom has been such a large part of the U.S. economy in recent years, its demise could likewise have a cascading effect through other sectors. It may prove to be an even bigger event than the crash of the tech bubble in 2000 and 2001, he added.
Here are a few sobering thoughts to ponder: The wealth effect of tech stocks pales compared with the financial importance of peoples' homes, particularly in a country where lenders and policy makers have long encouraged excessive debt levels. (Interest payments on residential mortgages, even on vacation properties, are tax deductible.) In the past decade, the percentage of U.S. household wealth tied up in homes has climbed to 48.5 per cent from 38.7 per cent. And you've heard it many times before, but it bears repeating that Americans have literally been using their homes as piggybanks. Last year, they pulled $800-billion (U.S.) in equity out of their homes, pumping as much as $300-billion back into home improvements and other purchases.
The combination of falling home values and sharply higher borrowing costs will inevitably put the squeeze on millions of Americans, denting their free-spending ways. A 5-per-cent decline in house prices would shave $1-trillion from U.S. household wealth. And consumers make up roughly two-thirds of the economy.
Often overlooked is the employment effect of the construction industry. Mr. Roubini pointed out that about 30 per cent of all new jobs created over the past three years were directly or indirectly tied to housing -- the trickle-down effect that each home purchase has throughout the economy. Think about all the jobs in construction, building materials, real estate and lending. Then, consider all those industries that make stuff to fill those big homes, or supply all those people working in the industry.
Carry that kind of logic a few steps further, and you could have the makings of a global recession. The United States, after all, has been the world's economic engine for nearly a decade.
So this is about more than just Mr. Toll's pain. A lot of people could soon be sharing his pain, and his hard landing.
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