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Winds Blow Round the Real-Estate House of Cards

January 08, 2008 04:18 PM
by findingDulcinea Staff
Signs that the economy is slowing down are making home owners nervous. House prices are set to drop, but the government may act to stop them plummeting.

30-Second Summary

In the first five years of this decade, U.S. house prices rose 50 percent. To the authors of an April 2005 federal agency report, such a steep rise had bubble written all over it. The market started to deflate a year and a half later.

The housing market slid in late 2006 as more and more borrowers defaulted on sub-prime mortgage payments. Foreclosures and evictions left a lot of new homes unsold and kept old ones vacant.

Since then, house prices have fallen 5 percent and so have sales, according to the Standard & Poor’s Case-Shiller home price index.

The bust is not unprecedented. Housing bubbles burst in Los Angeles in the early 1990s, San Antonio in the mid-1980s and Hartford at the end of the 1980s. The difference this time is scale: the housing market has slumped nationwide, even in places where the market was strong, such as Southern California, Arizona, Nevada and Florida. 

If there is a wider economic slowdown, which seems likely because of soaring oil prices and the continuing credit squeeze, house prices will decline further. According to Moody’s Mark Zandi, residential real estates prices will drop 15–20 percent in 2008 unless the government intervenes. Many economists agree that prices will continue falling, but are less pessimistic about how much: the most common forecast is a decline of 5–10 percent.

The Fed cut interest rates three times in 2007 in an effort to prevent credit-squeezed borrowers from losing their homes. It set up an auction facility to provide emergency loans for embattled banks. Bush said Friday, Jan. 4, that his administration is preparing a package to boost the economy.

Headline links: ‘Bush Ponders Move to Bolster Economy’

Background: Three remedies, two failures.

Opinion & Analysis: Grim predictions for the housing market and the economy

Reference: Prices, busts and casualties

Related links: Manhattan escapes the housing slump


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