Is Real Estate Speculation Healthy for the Economy?

It's tough to know whether or not the current real estate speculation is going to be healthy for the economy in the long term. A lot of economists don't think it's a good idea to have so much riding on the housing sector.

Speculation or not, the runup in real estate prices raises a basic question: Is it healthy for economic growth? If the market slows, some home owners will be stuck with hefty mortgages, fat monthly payments and little equity. The market is unlikely to collapse, but some owners will be forced to pull their houses off the market or sell for less than they expected. That would create a downdraft that will suck the life out of many investments.

"We find that the red-hot housing sector alone, which typically represents just 5% of the total economy, accounted for an astounding 50% of the overall growth in the U.S. economy by the first half of this year, and more than half of the private payroll jobs created since fall 2001 were in housing related sectors," Merrill Lynch (nyse: MER - news - people ) economists Kathleen Bostjancic and David Rosenberg said in a economic commentary.

"We argue this represents an unhealthy and disproportionate share of economic growth. The over-reliance on residential investment leaves the economy very vulnerable if housing demand and prices cool--prices do not need to even fall, just a slowing in the pace of home price appreciation would have a noticeable negative impact on economic growth--not unlike the fallout following the frenzied tech over-investment in the late 1990s."