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Economists: Housing Slump Could Dampen US Economy


The U.S. economy is in an upturn, and many analysts predict a continued recovery. But economic forecasters in Los Angeles warn of storm clouds on the horizon. At a time of rising interest rates, they see worrying signs in the nation's booming housing market.

U.S. retail receipts are up. So is factory production. Jobs are being created and the U.S. economy grew at a rate of nearly four percent last year.

2004 was a great year, says Edward Leamer, director of the quarterly forecast at the Anderson School of Management at the University of California, Los Angeles. He says the good times may continue for a year or two, but by 2006 or 2007, he thinks the U.S. economy may face some stormy weather.

"The risks come from the housing sector. We have an over-inflated housing stock,” he said. “We have very high levels of building, construction, repair work."

He says that even a modest cutback could send the country into recession, and he believes recession will probably come by the end of the decade.

Home prices have gone up quickly in many parts of the country, including southern Florida, Washington DC, and parts of the northeastern United States. In southern California, housing prices have doubled in the last three years, fueled here as elsewhere by low interest rates that have spurred a frenzy of buying and refinancing.

UCLA economist Christopher Thornberg says the rise in home prices totals $500 billion in California, and he says it gives homeowners a false sense of wealth.

"This is an enormous amount. In fact, it represents something on the order of $25,000 in terms of housing appreciation for every adult in the state," he explained.

Some people are borrowing against the equity in their houses and are using the money for home expansion or other purchases.

In parts of the country where housing costs are lower, cheap interest rates have fueled new construction. Edward Leamer says homebuilding in those areas has also helped to boost the nation's economy.

But U.S. interest rates are rising, pushing up costs for buyers, so nearly everyone expects the housing market to slow. Mr. Leamer says that if history is a guide, a future housing downturn will spell trouble through the whole economy.

"In fact, we've had 10 economic downturns since WWII. Eight of them got started in the housing sector," he explained.

He says the United States has been the engine of global growth in recent years, as U.S. consumers have engaged in a worldwide buying spree, purchasing products especially from China and other parts of Asia. He says a weakening dollar and sagging U.S. market could slow global growth in just a year or two.

However, the economist sees a possible bright spot on the horizon. He says the lower value of the U.S. dollar against many currencies could spur demand for U.S. exports, and moderate the downturn.

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