Wednesday

U.S. Economy Update - Will the Housing Bubble Lead to Recession?

The economy and the housing market have been doing very well the past 10 to 15 years. The new housing construction and remodeling industries have been riding a wave of high growth and maximum earnings (despite an economic slowdown at the beginning of this decade.)

The biggest problems that have arisen during all this time are that incomes have grown but have not kept pace. Also, fewer jobs have been added within that same time frame. Now, that could mean that our current workforce is more productive, but it's bad news for our real estate market - fewer workers means they need fewer houses.

Our new Federal Reserve Chairman, Bernanke, could be the deciding factor on how our economy performs over the next two years. Bernanke's policies and communication style are much different from Greenspan's (the former Chairman.) If he focuses too much on stifling inflation, he could create a serious recession in the coming year. If he lets the economy grow again, inflation could skyrocket (and higher prices will also have the effect of lowering demand for materials and labor in our construction industry.)

What has many concerned is our bond market. The bond market pricing has been showing to a very high, very flat yield rate (with little or no difference between the 3-month T-Bill and the 10 year bond.) Every time this has happened in the past (the early 70's, 1975, the early 80's, early 90's and 2001) the economy has ground to a halt and we were mired in a recession.

If the economy is going to slow down, and it looks like it will, the degree of the slowdown is going to be determined by the real estate/housing market. Housing prices are not going to fall like crazy but they will not appreciate for a while and will drop in many areas across the country. The question is: how many people will be hurt by a loss of equity in their homes or a rise in their interest rates? There are also many jobs tied to the real estate and construction industries and the loss of jobs could continue to pound down any economic growth. Many consumers have been overspending, having gotten used to the years of successful prosperity, and it could come crashing down. Fuel prices have lessened somewhat, but most agree that they will rise again by winter, so consumer confidence is shaky and could get worse with any more economic bad news.

The one good area of possible growth for the construction industry? Commercial. Retail may suffer if there is an economic downturn, but office construction and multi-family unit construction should grow in 2007. Apartment construction should be strong - if interest rates rise, it will become more affordable to rent than own. And many apartments were converted to condominiums to cash in on last year's real estate boom. The shortage of apartments will create strong growth as demand continues to rise.

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Read Top 10 Tips to Surviving an Economic Slowdown with your Small Business.

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