NATIONAL HOUSING WOES THREATEN CONTINUED
ECONOMIC GROWTH
UH Economist Smith Says Bayou City Better off During
“Housing Bust: How Soon? How Bad?” Address
HOUSTON, May 2, 2006 – Despite some optimistic predictions
of a “soft landing” for the nation’s housing market,
University of Houston economist Barton Smith says those prospects
remain rather shaky.
There are a sufficient number of markets throughout the nation
that are so vulnerable to a major market correction that it is unlikely
that the U.S. economy as a whole will be able to escape some negative
consequences. However, the most positive aspect of the current situation
is that many urban markets, especially in the nation’s mid-section,
will escape most of the direct blow and only feel the secondary
impacts associated with the subsequent national economic slowdown.
Fortunately, Houston is among this latter group.
During his annual real estate symposium, Smith pointed to excessively
high prices and extremely low affordability in about a quarter of
the nation’s home markets as well as a dangerous rise in sub-prime
lending that is already producing high levels of foreclosures. In
that regard, Houston is not exempt. Local foreclosures are three
times higher than they were just three years ago.
Smith said that current national lending practices are squeezing
households into home ownership they really can’t afford when
you take into account the full costs of that responsibility and
the risks associated with it. These practices also encourage households
with incomes sufficient to qualify for ownership to consume more
housing than is prudent, given their economic circumstances. This
is leaving hundreds of thousands of Americans with excessively tight
budgets – budgets that have no room for savings and little
room for the unexpected, such as the recent surge in energy prices.
Smith, UH director of the Institute for Regional Forecasting, addressed
more than 1,000 people at his real estate-focused program, “The
Housing Bust: How Soon? How Bad?” May 2. Smith does not say
that such a bust can’t be averted, but he said that a scenario
for a soft-landing for this market is problematic.
“Two major unanswered questions are when will the Federal
Reserve Bank stop raising interest rates and when will long-term
fixed mortgage rates finally catch up with the FED’s past
tightening,” he said. “I hope we have only one more
quarter point rise before the FED pauses for the rest of this year.
We have now finally reached the point where further interest rate
hikes could really get the housing market correction going. Already,
home sales are weakening. Bringing the housing market back down
to earth slowly is going to require real finesse, perhaps a level
of monetary fine-tuning that is beyond the FED’s abilities,
especially at a time when they are preoccupied with the inflationary
implications of high energy prices.”
As a part of his presentation, Smith contrasted the current environment
with the last housing market correction of the early ’90s.
The post correction spike in home prices looks very much the same.
The environment of rising interest rates is also similar. But, he
reminded his audience that the real estate bust of the early ’90s
was spread across all types of real estate from residential to commercial
to land. Today, he said, the only market in real jeopardy is the
residential market. That ought to help minimize the spillover effects
to the national economy as a whole. Nonetheless, the consumer, who
accounts for three-quarters of aggregate demand in this country,
is extremely vulnerable right now. A significant blow to the value
of their most important asset would not be good for the national
economic expansion that is already beginning to slow.
Houston, on the other hand, will be cushioned by a housing market
that is still very affordable and a regional economy that is reaping
the benefits of high energy prices. This won’t produce a ’70s
boom within Houston’s new diversified economy, but it will
greatly cushion the region should the national slowdown get out
of hand. Still, when it comes to energy prices, Houston can have
too much of a good thing.
High energy prices stimulate the local energy economy, but they
pinch the pocketbooks of consumers here just like in any other part
of the country. Excessively high energy prices sufficient to bring
the U.S. economy to its knees will also impact Houston’s large
energy-independent base and virtually all of the local secondary
sectors in the economy. Houston has an interest in a national soft
landing for the housing market, even if our market is less vulnerable
to the inevitable correction that is just around the corner.
“I expect local job growth in 2006 to be close to the pace
we saw in 2005 – strong, but not quite a boom. After that,
as energy growth slows, it will all depend on the health of the
national economy and that, in turn, will largely depend upon the
fate of the housing market.”
Smith has conducted numerous studies in urban issues, housing, transportation
and the environment. During the past 15 years, he has gained national
recognition for his analyses of the Houston economy and real estate
markets. Smith wrote “Handbook on the Houston Economy”
and continues to publish two symposium reports a year on Houston’s
economy and real estate markets.
About the University of Houston
The University of Houston, Texas’ premier metropolitan research
and teaching institution, is home to more than 40 research centers
and institutes and sponsors more than 300 partnerships with corporate,
civic and governmental entities. UH, the most diverse research university
in the country, stands at the forefront of education, research and
service with more than 35,000 students.
For more information about UH visit the universitys Newsroom at www.uh.edu/admin/media/newsroom.
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