Fed Chairman Ben Bernanke testified in Feb., 2006 that:
“For example, a number of indicators point to a slowing in the housing market. Some cooling of the housing market is to be expected, and would not be inconsistent with continued solid growth of overall economic activity.
However, given the substantial gains in house prices and the high levels of home construction activity over the past several years, prices and construction could decelerate more rapidly than currently seems likely.
Slower growth in home equity in turn might lead households to boost their saving and trim their spending relative to current income by more than is now anticipated.”
That was a reasonable prediction. The “cooling of the housing market” part has pretty much happened in all the hot markets, but I haven’t seen much regarding the “households to boost their saving and trim their spending relative to current income” part. What does that mean to me? A predicted drop in consumer spending which will most likely lead to a rise in the unemployment rate. It’s fairly obvious that unemployment will rise in construction, lending and real estate related industries, but when consumer spending declines, there isn’t as much demand for those goods and services that fly off the shelf during the “happy happy” times.
So here’s a prediction for how the real estate markets are going to move. Gradual decline through 2010 for any area that has seen double digit valuation gains. Why? The crappy loans given to anyone breathing don’t finish the majority of their resets until 2010. After 2010? Probably more decline. Housing prices move inversely to unemployment rates. When unemployment is really low, housing prices tend to move up. When unemployment goes up, housing prices tend to move downward.
I don’t know that there’s ever been a housing induced recession, but it looks like we’re going to get to experience one. The good news, of course, is that those people who do not live in wildly inflated real estate markets probably won’t see too much of a decline. Interesting times, indeed.