When the air is expanding inside a speculative balloon, stretching the film of credibility that contains it to an ever-more improbable thinness, you can always find someone to explain why this time it’s different — why technological/demographic/astrological factors justify valuations today that have always proved historically unsupportable.
Until the bubble actually starts to deflate or burst, there’s just enough doubt about whether prices really will revert to their historical mean to keep us all guessing. Even the most convinced sceptic can never say with any certainty when a bubble will collapse, and so the science of identifying bubbles is an inherently retrospective activity.
But it looks now as though we can say with some confidence that the long American housing bubble is over.
So what might happen next?
In previous periods of weakness in property markets there have been huge institutional collapses. The savings and loans debacle of the early 1990s is the most recent example. Today, again thanks to increased financial efficiency, the risk of such a massacre seems smaller. The securitisation of the nation’s mortgage market has spread the geographical and sectoral risks to the broader economy.
But there will still be many financial institutions with significantly impaired balance sheets as the value of their mortgage-backed securities declines sharply over the next year. All in all, even on the most optimistic assumptions, post-bubble conditions in the housing market would be highly uncomfortable for America and could seriously sap demand in the world.
And another from the UK, through Taiwan, US housing slump feeds fears of crash,
The downturn in the US housing market will force businesses to slash 73,000 jobs a month in the new year and could be more damaging to the world economy than the dotcom crash, economists have warned.
After official figures last week showed that the number of new homes sold last month was 22 percent lower than a year earlier, while prices were almost flat, fears are mounting that the “orderly” housing slowdown predicted by the US Federal Reserve will become a full-blown crash.
“Things do seem to be getting worse very quickly. Freefall is a strong word, but I think it’s the right one to use here,” said Paul Ashworth, chief US economist at Capital Economics.
From Canada, Downturn leads to higher risk of U.S. recession,
Mounting evidence of a slowdown in the U.S. housing market has led some forecasters to increase the chances that the world’s largest economy will be limping into a recession next year.
“We have decided to raise the odds of a U.S. hard landing to 40 per cent from 25 per cent,” National Bank Financial economists Clément Gignac and Stéfane Marion said in a note yesterday.