May 27, 2005

Is the U.S. economy in the midst of a housing bubble?

And is that bubble going to burst sometime soon?

Former nay-sayer Paul Krugman is starting to think that the answer to both questions is Yes.

Nobody thought the economy could rely forever on home buying and refinancing. But the hope was that by the time the housing boom petered out, it would no longer be needed.

But although the housing boom has lasted longer than anyone could have imagined, the economy would still be in big trouble if it came to an end. That is, if the hectic pace of home construction were to cool, and consumers were to stop borrowing against their houses, the economy would slow down sharply. If housing prices actually started falling, we'd be looking at a very nasty scene, in which both construction and consumer spending would plunge, pushing the economy right back into recession.

That's why it's so ominous to see signs that America's housing market, like the stock market at the end of the last decade, is approaching the final, feverish stages of a speculative bubble.

Via NY Times.

Posted by Magpie at May 27, 2005 01:37 AM | Economy | Technorati links |