[Mb-civic] An article for you from an Economist.com reader.

Sun Sep 18 15:56:52 PDT 2005

- AN ARTICLE FOR YOU, FROM ECONOMIST.COM - 

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Michael Butler (michael at intrafi.com) wants you to see this article on Economist.com.

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A HOME-GROWN PROBLEM
Sep 8th 2005  

America's housing boom is causing an enormous misallocation of resources

THE past few years have seen simultaneous housing booms in an unusually
large number of countries. However, according to THE ECONOMIST's global
house-price indices, in the second quarter of this year the pace of
increase slowed in most places, compared with a year ago (see table).
In only two of the 20 countries covered have prices accelerated
significantly this year: the United States and Denmark.

The sharpest drop in annual house-price inflation over the past year
has been in Britain (from 19% to 2%). Australia, New Zealand and South
Africa have also seen a marked slowdown: Australian prices have even
fallen, if only by 0.1%. Housing markets in Spain, France, Italy and
Ireland have also cooled a bit.

By contrast, America's housing market remains red hot. Average home
prices jumped by 13.4% in the year to the second quarter, the biggest
rise in 26 years--in real terms, the biggest on record. Prices are now
rising at a double-digit pace in 24 states, plus Washington, DC. Seven
states and the capital enjoyed gains of more than 20%. 

Even Alan Greenspan, the chairman of the Federal Reserve, now seems to
agree that American homes look overvalued and that there is a risk that
prices could fall. A common counter-claim is that house prices are
sticky downwards: the national average has never fallen year-on-year.
But declines are far from rare in many parts of the country. Richard
DeKaser, the chief economist at National City, a Cleveland bank, has
found that in the past 20 years as many as 63 out of 299 metropolitan
areas studied have seen house prices fall by 10% or more over periods
of at least two years. The median decline during these slumps was 17%.
This is the first time that booms--and hence potential busts--have
occurred in so many states at once. 

The popular argument that high house prices are justified by low
interest rates has also been stretched to its limit. The affordability
of houses for first-time buyers, measured by the ratio of median income
to median mortgage payments, is at its most daunting since 1989--the
market's previous peak, after which average nationwide home prices
failed to keep pace with inflation for five years. 

On the surface, America's housing boom looks more modest than those
elsewhere. Since 1997 prices have risen by only half as much as in
Britain. On the other hand, the property boom has probably caused a
bigger misallocation of resources in America because of the response of
borrowers, savers and investors. Residential investment has risen to 6%
of GDP, close to a record. Add in the wealth effect from rising home
values and the boost to spending from mortgage-equity withdrawal, and
housing accounted for an astonishing 50% of GDP growth in the first
half of this year, reckons David Rosenberg, chief economist at Merrill
Lynch. Since 2001 more than half of all private-sector jobs created
have been in housing-related industries. 

Second-quarter figures, due later this month, are likely to show that
the value of property rose to 33% of households' total assets--the
highest in the 60 years for which data exist. Banks' profits have also
been unduly dependent on mortgage lending. According to the Bank Credit
Analyst, a Canadian research firm, property loans now account for 53%
of banks' total lending, up from 30% two decades ago. 

The American economy's addiction to housing leaves it exposed not only
to a cooling of property prices, but also to long-term costs. The
technology bubble in the late 1990s at least left behind a modern
capital stock, which continues to yield productivity gains; a property
boom, in contrast, does nothing to boost long-term growth. Instead, it
diverts resources away from more productive sectors and by fuelling
consumer spending it exacerbates America's economic imbalances.
Eventually, there will be a price to pay.

See this article with graphics and related items at http://www.economist.com/printedition/displayStory.cfm?Story_ID=4385293

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