If predictions of a correction in the US housing market are right, the global economy is in for a very bumpy ride
David Rosenberg, the chief economist for North America at Merrill Lynch in New York, is "convinced that the housing market is ripe for a price correction". If he is right, 30 years of history suggests any collapse would imperil the outlook for global economic growth.
Thomas Helbling, deputy chief of the world economic studies division at the International Monetary Fund, tracked the housing market histories of 14 industrialised nations for the period from 1970 to 2002, finding 75 home-price cycles. Bull markets typically lasted a bit less than three years, with prices climbing by a cumulative 11% when adjusted for inflation. Bear markets were about one-year long and prices fell about 6%, the study found. In boom times, defined by Helbling as the top 25% of periods of rising prices, prices climbed for about four years with an average increase in house values of 32%.
Housing market busts also persisted for about four years, with prices declining by an average of 27%. About two-thirds of all housing market booms ended in a bust, when booms are measured using cumulative house price gains in the eight quarters leading to prices peaking, Helbling found. That dropped to about 40% when booms were calculated from peak-to-peak instead. In the past four years, the average price of a US home resale has climbed by almost 38%, according to data compiled by the National Association of Realtors. The average price of a single-family US home surged to a record $266,100 last month, the association said earlier this week.
Houses for first-time buyers are the least affordable since the third quarter of 1989, when rising energy prices and higher Federal Reserve interest rates last coincided with a bursting bubble, Rosenberg wrote in a research note this week. "New home sales plunged 20% in the ensuing year as demand responded to the affordability erosion," he said.
"Bubbles usually end, not necessarily because of higher interest rates, but because you reach a price point where the bids dry up," wrote Rosenberg at Merrill. "When you treat your rising home price as a bonus to be spent every year, and that source of so-called income dries up, so does your economic activity." US homeowners used mortgage refinancing to suck more than $212bn out of their houses in the second quarter, up 25% from the first three months of the year, Freddie Mac said earlier this month. Almost 75%of the refinancing in the second quarter was to generate extra cash. Without that extra source of quasi-income to sustain the world's biggest economy, the Cassandras who see low bond yields as a harbinger of hard times to come may yet be proved right.
Mark Gilbert, Bloomberg columnist
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