Effects of the End of the Housing Bubble

Edward Leamer’s quarterly forecast was released today. It was quite pessimistic regarding the housing market:

LOS ANGELES – A sustained decline will hit the U.S. housing market next year, costing the nation as many as 800,000 jobs, according to a new economic report released Wednesday.

The slowdown is likely to last several years, with as many as 500,000 construction jobs and 300,000 financial sector positions lost, the quarterly Anderson Forecast predicted.

“We expect housing to start slowing the economy this quarter or the next,” said Edward Leamer, director of the study done at the University of California, Los Angeles.

“Some jobs in manufacturing might well disappear as a result of weakness in housing, but this may be offset by jobs brought home or not lost to foreign competition,” he wrote.

The forecast said eight of the last 10 economic recessions were started by housing market slowdowns. Though the coming cooldown will cause a drag on the nation’s economy, it will fall short of triggering a recession, the forecast said.

Personally, actually think that the chances are decent that a drop in housing-related activity as sharp as the one that Leamer forecasts will tip the economy into recession. In addition to losing several hundred thousand jobs (in an economy that is creating less than 2 million per year), the effect of stagnant or falling house prices on consumer spending and bankruptcy rates (and the resulting repercussions on financial firms) could be substantial. And I suspect that others agree, which may explain why the yield curve continues to flirt with inversion…