Three Percent Drop or The China Scenario?

Two weeks after we challenged frothy assertions about the housing market in a page one story in the Boston Globe, the real estate bubble is back on the front page.  This time instead of quoting brokers and builders, the Globe turned to a more credible source:  the New England Economic Partnership.  They forecast "a modest housing slump in Massachusetts that will last through early 2007, with prices, at the bottom, declining about 3 percent." 

While NEEP projects that falling prices will be offset by a strengthening regional economy, Princeton Economist Paul Krugman paints a much bleaker scenario in his editorial, The Chinese Connection, in today's New York Times. Here's a snippet:

"Here's what I think will happen if and when China changes its currency policy, and those cheap loans [to the US treasury] are no longer available. U.S. interest rates will rise; the housing bubble will probably burst; construction employment and consumer spending will both fall; falling home prices may lead to a wave of bankruptcies. And we'll suddenly wonder why anyone thought financing the budget deficit was easy."

Earlier this week, Krugman told an audience in Bangkok, "There is a real bubble mentality in the US housing market,'' adding that prices of US housing were 250% of their real values.

So if one's perception of the regional, national, and global economies determines one's belief about whether the housing bubble will deflate or burst, where do you stand?  We'd love to hear your perspective, particularly if you are buying or selling this Spring.  (If you do decide to buy despite the real estate bubble debate, we invite you to use our commission rebates as a cushion against a loss in value.  If you're selling, why not try for sale by owner to maximize your equity particularly if prices begin to slide in the second half of 2005?)

Co-authored by Bill Wendel and Douglas McCarroll, our newest real estate consultant / buyer agent at The Real Estate Cafe