Housing bubble deflating

Marketplace Staff Jun 28, 2006

TESS VIGELAND: We just heard an earful about Robert Reich’s last commentary. Let’s see what you say about his next one. We’ve been hearing for about two years that the so-called housing bubble would pop any minute. It hasn’t. But there are signs the air is starting to seep out of the bubble. The latest government reports show new home construction recovered a bit in May but is still way behind last year. And a record number of homes are sitting on the market. Reich is joining the ranks of those who say the giddy fun is over.

ROBERT REICH: America’s housing bubble has not burst. It has just sprung a leak the size of your average mortgage banker. The boom is over, folks.

All across America, backlogs of unsold homes are on the rise. Price increases are slowing. In some markets, home prices are actually dropping. I just bought a house in Berkeley, Calif., I couldn’t have afforded a year ago. I still can’t afford it, but at least I’m breathing.

It’s better that bubbles leak than burst. Gradual declines are always easier to manage than explosions. But the housing boom has been so large and so important to the American economy over the past five years that even this slow leak will cause severe headaches. One will be for millions of households that have turned their growing home values into piggy banks to finance their continued consumption. Well, that easy route to cash is just about gone.

The inevitable result will be less consumption, which will mean fewer jobs.

A more immediate problem will arise for all the people making, financing and selling houses. Here we’re talking about a vast army of carpenters, roofers, plumbers, mortgage bankers and real-estate agents. These jobs pay well and don’t have to compete in global commerce. According to Moody’s, housing-related employment has accounted for almost a quarter of the 5 million jobs that have appeared since 2003.

But with the boom over, many of these jobs will be over, too. In other words, without the housing bubble, the American economy will lose a lot of its fizz. I don’t like bubbles, but from a jobs standpoint this recovery has needed all the fizz it can get.

Which brings us to Ben Bernanke and his gang at the Federal Reserve Board Open Market Committee, which meets tomorrow. It’s an open secret they’re planning to raise interest rates yet again, because they think the economy is too fizzy and still prone to inflation. I hope they listen carefully.

The hissing sound they hear is air escaping the housing bubble. There’s less fizz in the economy than they think. Raise interest rates and the Fed raises the likelihood the economy will deflate.

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