EclectEcon

(I posted this a year ago this coming weekend):

That [headline is] the prognostication of economist Ed Leamer:

In Leamer’s view, the housing market appears to have peaked “in California and elsewhere. It will take more than a year for this weakness to turn into job losses and to affect the economy in general.” [emphasis added]

And, yes, he’s using the “R” word. As in “recession.”

Leamer lays the blame squarely on the Federal Reserve for leaving interest rates too low for too long. Now, he says, we’re not only heading for trouble in the housing sector, but in the auto industry — another market that got drunk on historically low rates.

Low borrowing costs accelerated future sales by enticing consumers to trade up to bigger homes and new vehicles sooner than they might have done otherwise. Instead of waiting to buy a new family car in a couple of years, folks said, “Oh, what the heck. Financing is so cheap we might as well get it today.” As a result, car dealers lose the sale they would have gotten two years from now.

As rates creep higher, consumers happily driving their new cars or living in their larger homes have no motivation to purchase additional ones. Since consumer spending drives two-thirds of our economy, when consumers close their wallets, the impact is far-reaching.

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Update in 2006: With growing doubts and concerns about what will happen in the US economy over the next year or so, it looks as if Leamer may have called it pretty well.

For more on the housing slowdown and possible recession, see the postings at Calculated Risk and Econbrowser.

And for a really bleak outlook, see the charts reproduced at The Big Picture, where Barry Ritholtz contrasts what most people think of as a "housing bubble" with what he and Lon Witter call a lending bubble. Interestingly, these concerns were being raised a year and a half ago (and brought to my attention by MA and Sean), but only now are the predictions being realized. Ed Leamer seemed to have the timing right, too.