Stephen Roach on the Turning US Housing Cycle

by: Stephen Roach

Excerpt from Morgan Stanley economist Stephen Roach's weekly essay on global markets:

I do not think there is any doubt that the US housing cycle is now turning. The questions pertain more to scope, speed, duration, and depth of the coming adjustments. In an era of financial-market deregulation -- especially since deposit ceilings in mortgage lending institutions were eliminated by the early 1980s -- residential property cycles have taken on a life of their own. As a result, both the uplegs and the downlegs have lasted far longer than standard business cycles. The data flow has certainly shifted to the downside -- namely, mounting inventories of unsold homes, declining mortgage loan applications, rising financing costs, and anecdotal reports from builders and realtors.

A housing downturn will have obvious and important implications for US GDP growth. The direct effects are straightforward: Over the past three years, 2003-05, residential construction activity has boosted real GDP growth by about 0.5 percentage point per year. In data just released for 2Q06, the sector was estimated to have reduced annualized GDP growth by 0.4 percentage point. To the extent the decline in new building activity remains orderly, reductions could continue at the second quarter pace. Relative to the heady gains during the final stages of the boom, that means the contribution of residential construction activity could swing from +0.5% to -0.5% -- imparting about a one percentage point drag on overall real GDP growth for at least the next couple of years.

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