Thursday, August 24, 2006

U.S. Housing Bubble Bursting?

There are increasing signs that this is in fact happening right now. First the existing home sales numbers yesterday, which showed falling sales, increasing inventories and falling prices and now the new home sales numbers today, which show exactly the same three trends of falling sales, increasing inventories and falling prices.

As Nouriel Roubini points out, this is likely to lead to an economy-wide slump in America already by next year as the construction sector is likely to contract, and as the end of home equity withdrawals will hit consumption as well. Roubini thinks this will lead to a much sharper recession than in 2001, and he is likely right about that. The 2001 recession was mildened by the blowing-up of the housing bubble through the swift Fed interest rate cuts, but this is likely to be more difficult to repeat, because for one thing, interest rates are much lower now than then and for another because it is difficult to see any sector where a new bubble could be created. America is now in the least favorable stage of the business cycle as Bernanke will have to deal with the mess Greenspan left.


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