$140 Billion speaks

Bubble trouble rubbish

NEW YORK -- Sept. 6, 2006 -- If there is one good reason to believe the U.S. housing market wasn't in a true bubble in recent years, and that the popping of that bubble won't soon spell ruin for the economy, it is that so many smart and otherwise optimistic experts have predicted just such a scenario for so long.

You know the basic plot: Millions of Americans saddled with homes they can't afford will face imminent foreclosure. That process will flood the market with more inventory -- driving down home prices even further.

Then this vicious cycle will begin anew until prices finally bottom out with a horrific thud. As a result, consumers will stop spending and the economy will dive into a severe consumer-led recession.

But what if the housing market not only isn't going into a death spiral, what if the U.S. economy is less dependent on housing than we were led to believe?

That provocative thesis comes from an unlikely and profoundly respected authority on such matters -- Ray Dalio and the folks at Bridgewater Associates, the second biggest manager of hedge fund assets in the world, with more than $140 billion in assets.

Bridgewater became that big the old-fashioned way: with decades of spot-on analysis of the U.S. and global economy -- which is why its take on housing merits notice.

First of all, Bridgewater believes that the housing market will likely enjoy a so-called soft landing, with prices dropping on average by only 7 percent -- the amount it says is likely needed to bring home prices back to average levels of affordability.

If that's the case, they say, the impact on GDP (gross domestic product) will be noticeable, but not too painful. One only has to look at the soft landing in Britain -- where housing mania preceded the American frenzy -- to see that a soft landing is not only possible but tolerable.

As for U.S. consumer spending, here too Bridgewater is betting that the indirect impact of rising home prices may have been overblown.

Although it is widely known that homeowners last year took out $530 billion in home equity and other home-related loans, Bridgewater believes with interest rates still relatively low, creative consumers are finding ways to replace that home piggybank with other types of financing from credit card companies and the like.

"The notion that a slowdown in housing leads to a slowdown in the economy is often true, but not because the housing market causes the slowdown," the Bridgewater report concludes. "Rather, interest rates generally are raised to a level that chokes off all activity and housing gets hit first. Our measures suggest rates are still too low to choke off the overall economy."

Of course, the recent housing mania is without precedent -- especially to the extent that it was driven and nurtured by record amounts of borrowed money. Given the excess, the case for a hard landing is easy to fathom.

But don't count the Bridgewater analysis out -- they have the track record, and so far the economic numbers are on their side.

Copyright © 2006 NYP Holdings Inc., Terry Keenan. All rights reserved.