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The Housing Bubble -- Is It Finally Ready To Burst?
by Rick Johnson
May 17, 2006

The Housing Bubble --- Is It Finally Ready to Burst?

Economists have been predicting the burst of the bubble for the past five years. Every year they have been wrong. 2005 was supposed to be the year when things really started to slow down. Low and behold, 2005 was another banner year. Those in the building supply business are sitting around smiling as they count the profits. I am not an economist, thank God, but maybe, just maybe the economists are going to finally be right as some signs are beginning to show that may indicate a slow down in the housing boom. And of course, the auto industries problems, specifically General Motors with their recent layoffs and plant closure announcements just adds strength to this conjecture. What’s the old saying? “So goes General Motors, so goes the economy.”

Sales of existing homes fell almost 3% in October and the decline could have been higher except for the demand created by the surge of Hurricanes, especially Katrina. The level of unsold homes in October was at its highest peak in nineteen years. Some of this may be attributed to the fact that prices have risen at a pace not seen in twenty five years. A chief real estate economist stated; “The housing boom has likely passed its peak. (We have heard this before) The boom is winding down. I expect continued softening in housing.” (David Lereah, chief economist for Realtors.)

Economists also predict that the buildup of unsold homes across the nation would dampen the surge in prices that saw 69 cities report double digit price increases this summer compared with third quarter 2004. Another prediction is an additional ½ point increase in interest rates by June of 2006 which could create a slow down in price increases to about 5% next year.

In reference to new construction, it also has shown signs that the bubble may be ready to burst. Housing construction and new building permits were down sharply in October. The Commerce Department reports that construction of new homes and apartments fell by almost 6%, which was the biggest decline in seven months. Applications for new building permits fell almost 7%, which is the biggest decline in six years. Nariman Behravesh, another expert chief economist stated, “We are likely to see a steady downward trend in housing activity over the next few months. Mortgage rates are at the highest level seen in more than two years.” National Association of Home Builders said a new survey showed builder optimism fell in November, the largest amount since the September 11th terrorist’s attacks.

So, is the bubble ready to burst? Many economists seem to thinks so. However, the statistics cited have been cited in the past. The predictions of a bubble burst have been reported in the past. On the other hand, some economists disagree at least partially. David Seiders, chief economist for home builders stated that he believed that sales of both new and existing homes, while still setting records for a fifth consecutive year in 2005, will only see a small 5% decline in 2006. This would represent a very soft landing (5% is not much considering the growth we have experienced over the past five years). Do they really know? Who knows? Maybe that’s why Roosevelt said he would only deal with “One Armed Economists.” So they couldn’t say, “On the other hand”…

Be cautious in 2006. Don’t panic but don’t bet the farm. Initiate a contingency planning process. If you don’t need the plan in 2006, so what, sooner or later the economists might get it right and that contingency plan that you have tucked away will become invaluable.

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