The Wall Street Journal is reporting that the housing market is cooling off. So, I guess that makes it official.
While housing prices are still at or near record levels throughout the country we are seeing greater divergence between asking and purchase prices (in favor of buyers...meaning they're paying less than the asking price) and longer sales cycles. The good news is that it ain't crashing. Not yet, anyway.
Everything in economics is inter-related, so it's kind of pretentious to say "x is causing y" when, in fact, you could probably make an equally good argument that "y is causing x". Nonetheless, there are relationships.
Here's what a cool-down in the housing market likely means. Given our ongoing "jobless recovery" (yes, I know that unemployment is down but I think largely because people have bailed out of the search...and even if I concede that is not the case we are seeing job creation but at nowhere near the levels one would expect given the state of the economy...it's one of the reasons that "jobless recovery" pisses me off...who's recovering?) income is stagnating across most demographic sectors (except about the upper 1%). What, then, keeps the economy going? How is it we're continuing to shop until our hands are bloodied by cuts from rapid fire credit card flashing? Home values. Specifically, home-equity extraction. As the values of homes have skyrocketed we have been sucking those gains out, either through selling said homes or, increasingly common, home-equity loans. The truly dark scenario is that the market doesn't just cool, it plummets, in which case those folks who have borrowed against equity are essentially carrying debt against a value that no longer exists. But it doesn't have to get that dicey. Nope...all that has to happen for broad ripples to shoot across the entire economic pond is that this cooling off results in fewer home sales and a plateau in home values. Meaning that we see fewer people sucking out equity increases 'cause the increases aren't so dramatic anymore. Bear in mind that home equity accounts for 1/3rd of households' net worth. Bottle up the growth and you will see a major pullback in consumer spending across the board. Economy slows, debt starts getting called in, bonds ain't worth as much, rates have to go up to get anyone to buy the debt, companies with high debt ratios cut back on employees, unemployment goes up meaning fewer people can buy houses, housing prices drop further, etc.
All in all, you might want to prepare for some rough sailing ahead. If you've got debt of any kind look for ways to aggressively reduce it. If you've got a home mortgage that's variable, get that mother fixed. If you have borrowed against your home prepare yourself for the value against which you borrowed to decrease...meaning pay that loan off as fast as you can. If you have a job with a stable, financially sound company, particularly one that is not carrying a high debt load, and are considering jumping to a more exciting but far riskier firm...depends on where you are in your life but you may want to consider staying with staid and boring for the time being.
Note: I got wind of the WSJ article via the weblog The Big Picture. If you're an econ geek you oughta check it out. It's well-written and loaded with links to cool econ-geeky data sources and articles.