Bigger than the Tech Bubble

Michael Mandel

It's official: The housing bubble is now bigger than the tech bubble. Take a look at this chart:

The dark blue line is consumer and business spending on technology (hardware and software), as a share of GDP. The light purple line is residential investment, as a share of GDP.

In the third quarter of 2005, Americans spent 6.1% of GDP on building new homes or renovating existing ones. That's a bigger share of the economic pie than tech got at the height of the boom

To me, this has become a no-brainer. These levels of residential spending are not sustainable, guaranteeing a housing downturn in 2006 (incidentally, as far as I can remember, this is the first time I've made this forecast). And the downturn will likely be sharper than most people expect, including a drop in median home prices nationwide.

However, a housing bust need not lead to a broader recession. The key is whether tech spending--flat at roughly 1997 levels, as a share of GDP--can rebound strongly. I believe that it can.

Added: I will be on CNN at 9:30 (ET) on Saturday morning, talking about my pessimistic outlook for the housing market for 2006.

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