Housing Bubble Deflation Negatively Impacting Other Industries

The ripple effects from the housing slowdown are reaching across a wide variety of economic and industry sectors, according to analysis from global accounts receivable management service provider Euler Hermes ACI.

In the latest Euler Hermes ACI U.S. Industry Outlook publication, two of the industry sectors that are spotlighted – lumber and chemicals – are showing "signs of weakness," said Euler Hermes ACI Risk VP Tony Clary. "The chemicals outlook continues to be tied directly to the strength of the U.S. economy, while the lumber industry is – of course – closely related to the housing market," he said. "With a forecasted economic slowdown and an already slowing housing market, both of these industry sectors show an increased amount of risk."

In 2006, the chemical sector saw stability and improved operating margins in both commodity and specialty chemicals as the U.S. economy maintained its growth. Good pricing and easing energy costs in the latter part of the year allowed momentum to continue, but end-user markets – particularly housing – saw a significant reversal in activity, which has impacted demand. The outlook for 2007 now reflects the current state of the U.S. economy. "The uncertainty over the housing market and a decline in industrial and manufacturing activity are likely to create a much more difficult environment," said Clary.

Meanwhile, 2006 saw a marked change in lumber industry conditions, as the quickly declining housing market caused lumber prices to slump, a condition that is continuing as the market continues to falter in 2007. "There are mixed opinions regarding how long it will take for the housing market to recover, with opinions ranging from the market already hitting bottom to a 24-month period before recovery," Clary stated.

Euler Hermes ACI Chief Economist Dan North referred to the housing market as "decimated" and tied the slowdown to the actions of the U.S. Federal Reserve. "Indeed, when the Fed raised interest rates for the last time in June 2006, the housing market bubble burst; housing prices peaked the very next month," he said.

The economic effects of the burst housing bubble appear to be reaching far and wide throughout the economy. "As of January 2007, asset value equivalent to 15% of GDP has disappeared from the housing market," said North. "This fall in value will not only cause mortgage defaults to rise and credit conditions to deteriorate, it will destroy some of the equity built up in the past few years which has been used to fuel consumer spending. As the consumer accounts for two-thirds of all economic activity, a faltering consumer will surely lead to a faltering economy. On a more intuitive level, asset value equivalent to 15% of GDP can not simply disappear without having a significant impact on the economy."

North said the time period for a housing market recovery could be a long one. "Before the bubble burst, year over year home prices had fallen only five times in the 451 months that prices have been recorded, and they had only once fallen for two consecutive months. The six month drop in housing prices from August 2006 to January 2007 is unprecedented, and four of the past six drops are the largest ever. Certainly this market has suffered a severe blow, and it seems unlikely that a meaningful recovery is imminent,"
he commented.