Housing Bubble is real and a risk to economy

April 2006

A piece by Andrew Laperriere suggests that the housing bubble is real and poses a risk to the economy. It is claimed that belief in the existence of a bubble is influenced by political outlook and accuses the right of not paying attention, or just being unrealistically optimistic.

He proposes that evidence of a housing bubble is overwhelming and that currently inflated home prices are unsustainable and unsupported by fundamentals such as price-to-income and price-to-rent ratios. He cites data from PMI and HSBC in support of the view that home prices in many US regions are overvalued.

The article claims that a correction in home prices is a threat to the economy since the $2.5 trillion in equity withdrawal from homes since the 2001 recession has made a such huge contribution to its growth. Laperriere describes how even a flattening of home prices would reduce mortgage equity withdrawal sufficiently to cut economic growth during the next two years. In addition since around 25 percent of job growth since the recession has been directly related to the real estate boom, resulting unemployment would also impact the economy. Others have recently waned of the risks of unemployment in real estate related sectors.

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