The housing bubble

“The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops.” That’s the subhead in a special report in The Economist, a leading conservative business journal. From Business Week to The New York Times to, most likely, your hometown newspaper, articles about the housing bubble are becoming common.

The main features of the housing bubble:

• In the past 10 years, house prices in the U.S. have risen 45 percent faster than inflation — 60 percent in the “bubble region” of the Northeast, Pacific Coast, and pockets in between.

• Twenty eight percent of new loans are “sub-prime” — high rate loans to low-income families who can barely afford their payments.

• Almost one-quarter of homes bought in 2004 were purchased not to live in, but for investment. “Investors are prepared to buy houses they will rent out at a loss, just because they think prices will keep rising — the very definition of a financial bubble,” according to The Economist.

• This bubble extends to most developed capitalist countries. It is larger than the global stock market bubble of the late 1990s; The Economist calls it “the biggest bubble in history.”

Many business-oriented economists are ignoring the housing bubble, or think it can go on indefinitely. But increasingly the question being posed is not whether there is a bubble, but how much economic pain there will be when the bubble ends. What kind of pain?





Defaults, foreclosures, bankruptcies

Already, many homeowners are in trouble. Deep in debt, any unexpected expense — medical, home repair, tax increase, job loss — can cause missed payments, leading to foreclosure. The problem is about to get worse. At least one-third of new homebuyers nationally in 2004 (60 percent in California) have mortgages with artificially low initial monthly costs. After 3-5 years, the monthly payments will soar. In 2007, an estimated 12 percent of the total national mortgage debt will be “adjusted” — almost certainly in the direction of higher monthly payments.





Recession and lost jobs

In the last four years, increased consumer spending has driven most of the country’s economic growth. Much of that spending is being financed by homeowners’ borrowing against the increasing value of their houses. In addition, an estimated 40 percent of private-sector jobs created in the last four years have been in construction, real estate, and otherwise directly related to the housing bubble. A collapse of the housing bubble could cut housing construction almost in half and reduce consumer spending, resulting in a serious recession with up to 6 million jobs lost!





Financial meltdown

The impact of a recession, along with rising mortgage defaults, will put strains on the financial system. Big mortgage lenders will be threatened, as will investors (like pension funds) that have a large stake in mortgage-backed securities. The last time something like this happened was the savings and loan scandal of the late 1980s. Taxpayers spent $500 billion bailing out the big players, including Neil Bush, brother of the current president, whose Silverado Savings and Loan Co. took $1.3 billion to clean up. The financial fallout from this housing bubble could be much worse.

State and local budgets will be impacted as the property tax base stops growing or shrinks, and rising unemployment leads to falling revenues from income and sales taxes.

It is impossible to predict when the housing bubble will end, whether it will deflate gradually or in a sudden burst, or the severity of the economic fallout. But we can predict with confidence that the Bush administration will try to put the full cost on the backs of the working class. That’s what happened when the stock market bubble burst, triggering a recession in 2001. Bush resisted any efforts to aid the victims of the crisis, directing billions in tax cuts to the very rich while letting unemployed workers and cash-strapped communities fend for themselves.

The possibility of severe recession ahead makes it even more important to win the fight to save Social Security and end the war in Iraq. Not only are these critical demands to protect the interests of working families, but defeating Bush on these key issues will also leave the people’s movements in a stronger position to demand that Wall Street, not working America, bear the cost of any future crises. A fact sheet on the housing bubble can be found at www.cepr.net/publications/housing_fact_200507.pdf.

economics@cpusa.org.