Potential for Housing Downturn has Economists Worried

"The reason the threat [of a downturn in the housing market] is so serious…is because the so-called ‘wealth effects’ stemming from the housing boom are much larger than those of the equity boom of the late 1990s, simply because many more people have much more of their wealth tied up in their homes than in stocks…With the Fed raising U.S. interest rates, most experts believe it's only a matter of time before mortgage rates follow suit, cooling the housing boom and straining consumers who have taken out variable-rate loans against their homes. Given that home-equity lines of credit alone accounted for a quarter of the U.S. consumer spending growth last year, the consequences could be sweeping. ‘This could lead to a decline in [consumer] confidence and a recession,’ says Yale University economics professor Robert Shiller, who discusses the current housing boom in the recently released second edition of Irrational Exuberance, his influential 2000 bestseller on the 1990s stock market bubble. The resulting pullback in U.S. consumer spending would have a ripple effect throughout the world, particularly in countries that export heavily to the United States. That means big consumer goods exporters such as China, whose rapid economic expansion continues to be a major driver of global growth, would suffer.”

Thanks to Michael Dudley