Just How Soft Will the Housing Market Get?

While I’ve been warning about a slowing U.S. housing market for two years now, news stories are only starting to pop up in the popular media on the slowing home property market.

Some specific news coverage:

— A recent report from UCLA Anderson Forecast says 800,000 jobs will be lost in the next 24 months because of the downturn in the U.S. housing market.

— Sales of new U.S. homes plunged 11% in November 2005, the biggest one month drop in a decade.

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— U.S. housing starts fell 8.9% in December 2005.

— Applications for U.S. building housing permits fell 4.4% in December 2005.

Not so widely followed news:

— Three high-rise condominium projects in Las Vegas, Nevada have been scrapped… blame soft demand for the $500,000-plus condos, as well as rising construction costs.

While it is the media’s job to report what has happened and it is the economist’s job to predict what will happen, I do blame past articles in major newspapers for painting such rosy pictures of the housing market that many consumers were lured into buying second and third homes at inflated prices.

The question today is not whether or not the housing market is softening, but just how soft will the housing market get? While I will do my best to keep you updated on how soft the housing market is getting, all my realtor friends are confirming that demand has softened substantially. I believe that moving the Federal Funds rate so high, so quickly, had the desired effect the Fed was looking for: Stopping the heated housing market. I believe the housing market will cool off significantly, going forward.

But, as I’ve said before, it’s just not higher interest rates cooling the housing market; it’s also foreign investors concerns over the value of the U.S. dollar, a cooling domestic economy, and overleveraged consumers.