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"What’s that Hissing Sound?” headlines a piece in the Economist:

“The boom has lifted the (U.S.) economy in three ways: it has boosted residential construction: it has made people feel wealthier and so encouraged them to spend more; and it has allowed homeowners to use their property as a gigantic cash machine, taking out money by borrowing against their capital gains. Merrill Lynch estimates that the three together accounted for more than half of America’s total GDP growth since last year.

“Counting construction, finance, and estate agency, the housing boom has been responsible for one-third of all the jobs created since 2001. If house-price rises level off, GDP growth could dip below 2% in 2007. If prices fall, expect a steeper slowdown.” Since it is now in the Economist, it’s official — housing is in trouble. But will prices actually go down?

We have a report directly from one of the hottest markets in the country, south Florida:

“We just missed it. The time to sell was a year ago. A guy came along and offered us $500,000 for that place we bought. We paid $450,000 for it two years ago. Our timing couldn’t have been worse. We expected to tear down the house and build a new one…and we were sure we’d make a couple hundred thousand in profit. Minimum. But you warned us. And we didn’t listen. And then, we got that offer for $500,000 and turned it down. We thought we could get much more. But that was then and this is now…I’d be happy to get back what we have in it. But we can’t even get anyone to look at it.”

Paul Kasriel says it’s the worst supply/demand equation of residential real estate in 34 years. Sales in July were down more than a fifth. Inventories were up more than a fifth. And a lot of real estate investors are now going to the liquor store to get another fifth. They wish they could turn the clock back a few months and unload properties at last year’s prices.

But maybe the situation is not as bad as it looks. The New York Times reported the news last week that real estate downturns in England and Australia have been surprisingly mild. And now, Business Week has a big story entitled “Housing: The Roof Won’t Collapse On The U.S. Economy.”

According to Business Week, housing can go a little soft without damaging the economy too severely. That view has become the mainstream dream. What do we know; maybe it will turn out to be true. As our friend John Mauldin points out, we usually muddle through. Usually, tomorrow is like today. Usually, nothing too bad or too good…happens. Usually, things are average, ordinary, common, and regular.

But wait, there is nothing ordinary about this housing bubble. In the space of less than 10 years, according to Robert Shiller’s index, the real value of residential property doubled. And householders doubled up their debt, too. Neither are things that happen every day; in fact, they’ve never happened before!

We are not looking into a crystal ball here. We are just putting two and two together. If things are usually usual, then when they are unusually unusual, they are probably more likely to become usual again, rather than become more unusually unusual. That seems so obvious to us, we won’t bother to explain it.

And when housing prices become usual, then the poor sap who has bet his house on something extraordinary is likely to be in a tight spot. And since the entire U.S. economy, and by extension the entire world economy, depends on him being able to continue to spend, then they’re all in a tight spot.

Yes, the whole world economy now depends on a man who spends money he doesn’t have — money of no sure value — on what he surely can’t afford, and which he probably doesn’t need anyway. He can only do so as long as his house rises in price. And now, that the rise in housing prices has come to an end. What next?

Everyone has come to expect slowing real estate gains. The boom is over; everyone seems to think so. So, where is the surprise? Where’s the money to be made…or lost?

Again, we don’t know. But in August 1982, Business Week famously predicted that the equity market was finished. Now, in August 2006, BW tells us not to worry: the roof will not collapse. BW might not be right, but it might be consistent; the roof might blow up.

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.

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