Those data I posted last night and some other recently released indicators of a significant housing decline got some play in The New York Times today, in a column called “Housing Gets Ugly,” written by economist/columnist Paul Krugman.
With people like Krugman throwing their hats into the ring, in other words, these numbers that are being released seem more important than ever.
He starts with this week’s Toll Brothers announcement of another big cut to the luxury home building company’s 2006 profit outlook.
Krugman is quick to share his thoughts:
Now what? Until recently most business economists were predicting a “soft landing” for housing. Even now, the majority opinion seems to be that we’re looking at a cooling market, not a bust. But this complacency looks increasingly like denial, as hard data – which tend, for technical reasons, to lag what’s actually going on in the market – start to confirm anecdotal evidence that it is, indeed, a bust.
Krugman summarizes the elements that contributed to the state of the market today. Rapid price increases drove many to buy homes as investments or stretch to get into homes they couldn’t afford. Speculation drove the market higher. “In other words,” Krugman says, “there was a market bubble.”
Eventually, he says, prices reached the point where not even the riskiest real estate gamblers could justify making a deal, and most areas in the country saw (and are seeing) significant price drops. People started selling before they lost any more profits, and now inventories of unsold houses have reached “glut” levels.
This is a recipe for a major bust, not a soft landing.
Later, Krugman points out the implications, nationwide, as people start to grapple with what happens next. He mentions the people related to the construction business, but also points out that the homeowners who used creative or “exotic” financing (like interest-only or negatively amortized loans) will find themselves in trouble soon, if they haven’t already. That will be a big blow to the greater economy, he says.
Krugman says he can’t state it as certainly as well-known economist Nouriel Roubini of Roubini Global Economics, who predicts a housing-led recession in the next year, but does opine that the reversal of the housing market – the “main engine of U.S. economic growth” – is enough to make him wonder how the country could possibly avoid a “serious slowdown.”