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December 14, 2006

Today's Housing Bubble Post - Rules Don't Apply?

-- by Dave Johnson

Remember the stock market bubble and all the talk of a "new economy" that meant stocks would just keep going higher? With that in mind, read this: Housing, auto slumps may defy usual role as recession harbingers,

New home construction is plummeting. Car sales are weakening. Investors have driven long-term interest rates well below the short-term rates set by the Federal Reserve. All these factors are present today, and all have been precursors of past recessions.

But the U.S. central bank and much of Wall Street are now betting that the old rules don't apply, and that a recession next year, while possible, is unlikely.

Ah, the stock market bubble? And what happened to the "new economy?" What happened to stocks? What always happens to speculative financial bubbles?

Whenever you start hearing that "the old rules don't apply" that's the signal to sell while you still can. Another warning sign is when you hear that "this time" things will be different.

"This time will be different," Ed Leamer, who heads the forecasting center at the University of California at Los Angeles's Anderson School of Management, predicts in a report. "This time the problems in housing will stay in housing." It's a prediction, he admits, that "keeps us up at night."

Many Fed officials and private economists believe home builders and auto makers are curbing production to trim excess inventories as a temporary response to a drop-off in demand that was unsustainable -- not because climbing interest rates are eroding affordability. If the optimists are right, the industries' troubles wouldn't be signs of broader forces tipping the entire economy into recession. Meanwhile, U.S. exports are benefiting from strong growth among U.S. trading partners, especially in Europe.

So, will it be different this time? We'll see.

Posted by Dave Johnson at December 14, 2006 2:04 PM

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