Manhattan Mortgage's managing director Barry Habib says the real estate market is going down.

Bank One's chief economist Diane Swonk says any major real estate market tumble is years off.

And Federal Reserve Chairman Alan Greenspan isn't quite sure how the greater economy will fare if either prediction comes true.

Unfortunately, economists, real estate experts and other market mavens speculating which way the real estate market will go and how that might affect the economy, likely won't have any answers until after it hits home with real estate consumers.

"Of course, these quantitative magnitudes are tentative, and a great deal of additional work will be necessary to better understand and to confirm the nature and magnitudes of the relationships between capital gains on houses and stocks -- realized and unrealized -- and consumer spending," said Greenspan, ending a Jackson Hole, WY speech during a symposium sponsored by the Federal Reserve Bank of Kansas City last week.

Translated, that means statistics lag, economic forecasting formulas are imperfect and no one can predict what is yet to be. History, however, often does yield some answers, if only in retrospect, but almost always with a lesson for the future.

History reveals as goes the real estate market, so goes the economy. Often a leading economic indicator, real estate markets in the past have dragged the nation down into a slump and it have helped wrest the nation back from a recession.

That's because so much of consumer spending is tied to the home. Consumers who buy home also buy things to put in it, they use the equity to buy still more stuff and then they buy bigger, more expensive, larger homes to fill up with yet more stuff.

"Of course, in addition to realized capital gains from the turnover of existing homes, there is a considerable amount of cash that is extracted from home equity without a home sale, principally from refinancing cash-outs and from home equity loans. Both types of equity extraction have risen considerably in recent years, in line with the marked rise in unrealized capital gains on homes," Greenspan said.

He added, "Some preliminary calculations suggest that the total of equity extractions from unrealized capital gains on homes that is spent on consumer goods and services per dollar of capital gains is a fraction of the spending engendered by the gains realized through the sale of a home. This difference occurs, to a large extent, because the net extraction of equity is much higher among homes that have turned over than among those that have not."

Real Estate's Economic Role

And that consumer spending is the real lubricant that keeps the economy cranking, accounting for at least two thirds of the gross domestic product a measure of the output of goods and services produced by labor and property in the United States.

In the waning days of the longest economic expansion on record, however, real estate has played a different role, instead of dragging the economy up or down, it's helped keep the expansion going and going -- like an alkaline battery-charged bunny.

From July 2000 to July 2001 the average price of homes in some cities exploded, moving from $330,833 to $505,000 in Boston and $464,867 in New York, for example, according to First American Real Estate Solutions.

The National Association of Realtors' quarterly report on prices in 125 metropolitan statistical areas, revealed that the median prices of existing homes rose 6.4 percent to $146,900 during the second quarter of 2001, compared with the same quarter a year ago.

But Habib, a student of history, says that only means the bubble is about to burst. Home prices are as over inflated as were many high-tech stocks and everyone knows how hard they fell. If real estate sinks, the economy is in for a long cold winter.

"I've been saying this all along, the housing market is definitely vulnerable. When anything goes like home prices have gone in the past few years, it tends to make you ask questions," Habib said.

"We saw this happen in '86 and '87 and '88 when you had unemployment start to creep up, you had a spike in oil prices and then what happened to home sales once interest rates went higher? Sales collapsed and people ended up owing more money on their home than the value of their home," added.

Swonk, conceded real estate may be out of control, but she told Fox-TV what's missing in the equation is the mortgage rate hike, something not likely to appear in the near future.

"We need to see that spike in mortgage rates before that occurs. We also need to see a much weaker economy and that's not going to happen. We've already seen the housing market defy gravity through what's been the worse of the economic slow down and the worse of the inventory cycle and the worst in job losses. That doesn't mean there isn't a collapse out there in home values. I'm more worried about three years down the road though, than tomorrow," she said.

Bursting Bubbles

But all of real estate isn't doing so well.

High-end luxury home markets and vacation home markets are taking a hit.

Luxury real estate sales on Hawaii are dropping as much as 20 percent compared to last year and prices are down 7 percent, according to Prudential Locations' second-quarter update.

Prudential also said average summer prices for vacation homes this year in Naples, FL are down to $370,493 from $422,360 last summer; in Rehoboth, DE down to $370,505, from $374,681; in Southhampton, NY down to $1,110,026 from $1,797,261 last year and in Vail, CO vacation home price averages fell to $747,825 from $789,665 last year.

"The market is starting to soften and interest rates have masked a lot of what is happening. It's just unbelievable how much home prices have appreciated. A tell tale sign is that if someone purchased a home a few years ago, he or she cannot afford to purchase that same home today," Habib said.

"It's the same thing that happened in '86, and '87 and its why '89, '90 and '91 were miserable years for the housing market. I'm not saying don't buy a home, I'm saying don't get caught up with a Realtor who tells you to over pay," Habib said.

That's what happened in Silicon Valley a decade ago and it may be happening again. Silicon Valley homes have lost 20 percent of their value just since January and values are plunging faster than they did during the last down turn. History also reveals, the rest of California and nation followed Silicon Valley's last downturn.

"I don't disagree with all these points. The housing market has offset the (loss of the) wealth effect from the stock market. People have been taking out and cashing in on their homes faster than equity is being created and on that front I am also concerned," said Swonk.

"I'm also concerned if you look across the country you will already see some isolated bubbles that have burst, showing turnover rates down 25 percent from a year ago and prices are down in Silicon Valley, but in Chicago homes are still flying off the market in bidding wars. It is a bubble. It's hard to time its collapse," she added.

But it's not just California's market, nor the luxury and vacation sectors showing weakness.

After the second quarter report, NAR's monthly report put the median price of homes at $150,800 for July, down from $152,200 in June, but still up from $143,300 a year ago. Prices fell in the South and the West, but continued to rise in the Northeast and Midwest indicating what could be the spots of a changing market. Sales fell in every region except the Northeast, pushing down the national sales figure, NAR said.

Habib says the numbers don't reflect a seasonal fluctuation, but an indication of what's to come.

"If you are thinking about selling the stars are aligned perfectly for you. I say this last month was the peak because people always get into homes before school starts and we are seeing some softening right now," Habib said.

For more articles by Broderick Perkins, please press here.

Published: September 6, 2001

Use of this article without permission is a violation of federal copyright laws.

Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.