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Again and again, the same mantra is repeated by economists: The housing market will be fine, just as long as there’s no major economic shock. As long as employment remains stable, history has taught us, any housing market slowdown will be limited in its duration.

But one theory that’s been propounded by economists around the country, and is a favorite of our own Alan Gin at the University of San Diego, is that as the housing market cools, there will be significant job losses. Those job losses could manifest themselves as that so-called “economic shock” and that could turn a small problem into a large one.

In this excellent article which I found courtesy of Bubble Markets Inventory Tracking, the author examines the impact of a forecast that 800,000 jobs could be lost in construction and real estate as the bubble bursts, lands or whatever.

The author, Charles Hugh Smith, argues that the estimated job losses – courtesy of those happy guys over at the UCLA Anderson Forecast – is grossly understated.

“When housing tanks, it doesn’t decline; it dries up and blow away. With builders already sitting on unprecedented inventories of unsold houses, does it really make sense to think housing starts will decline by 10% and construction employment will decline by only 7%? Experience suggests housing starts will fall by half or more, and employment will track that decline. If housing starts fall in half, then we can expect 3.5 million jobs lost in residential construction, not 500,000,” writes Smith.

He continues:

“The same is true of the mortgage and real estate industries. They don’t decline by 7%, they dry up and blow away. Sure, there will still be realtors and mortgage brokers, but their ranks will be thinned by at least a third (a conservative estimate). That would likely total well over 1 million job losses in those industries alone, three times the absurd UCLA estimate.”

In addition to all the construction workers who actually work on-site, Smith argues that hundreds of thousands of jobs will be lost in related sectors like transportation, decorating and manufacturing.

Add that up, and you’ve got something of a perfect storm, leading eventually to recession, Smith says.

“Put it all together and an estimate of 5.6 million jobs lost seems more realistic than a mere 800,000,” he writes. “That works out to 5% of total private employment in the nation. Does 5% of the total workforce losing their jobs seem extreme? If you accept that 3.5 million construction jobs out of 8 million are likely to vanish, and a million real estate and lending-related jobs will disappear, that’s already 4.5 million. If you consider the millions of manufacturing and retail jobs which are housing-dependent, then it’s no stretch to reckon another million jobs will be lost as housing starts and renovations plummet. And there’s your 5.6 million jobs lost.”

“As those paychecks vanish from retail and leisure outlets, doesn’t it make sense that employment in those areas will fall along with sales? When you consider the entire chain of spending which flows from housing, it’s not hard to imagine even more jobs falling by the wayside as consumer spending falls.”

Nothing like a nice cheerful bit of analysis to start the week.

WILL CARLESS

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