United States Real Estate: Some Thoughts On Recent Developments18 May, 2011, 2:28. Posted by Zarathustra
Tags: Economy, Federal Reserve, Real Estate, United States
The latest situation in the real estate market of the United States once again reminds us how damaging a real estate bubble can be.
The S&P/Case-Shiller Indices have basically confirmed that the housing market is headed to a double dip. This is not unexpected, of course. The experience of Japan in the late 1980s and Hong Kong in 1997 tells us how the combination of a burst of real estate bubble and a financial crisis produce devastation to the economy. Historically, real estate markets took an average of 6 years to bottom-out according to the research by Reinhart and Rogoff (2009), not to mention the 20 years of decline in Japan which is still happening.
Now the United States is in its 5th year since the market peaked in 2006. If it is lucky, then the market has one more tough year to go. Yet no one will know for sure if this recovery is going to be a average one or not. For now, it appears to me that the recovery in the housing market may need some more time.
Source: Standard and Poor’s
Today’s housing starts figure once again confirm the depth of the problem. Housing starts in April were way lower than the consensus estimate.
Source: Census Bureau
While I have previously assume that the Federal Reserve may start raising interest rates by the end of this year, my current suspicion is that they won’t. My impression is that recent data from the United States have been mixed at best, but the tightening in the emerging economies, particularly in China, will slow their economies down, which will probably be bad for the global growth. In particular, if the Chinese economy slowed significantly, together with the unresolved European problems (i.e. Greece), the global economy may face a period of turbulence again. At that time, deflation may once again become the key risk for the global economy, not inflation.