While the housing bubble has burst, there may be other bubbles building that could pop with disastrous consequences for Americans.
The U.S. economy is being propped up by deficit spending -- about $1.3 trillion in the just-ended fiscal year, representing nearly 10% of the nation's gross domestic product. What would happen if lending to the U.S. government stopped because the United States was no longer viewed as a reasonably good credit risk? What would happen if the Federal Reserve could no longer print money (quantitative easing) because of rampant inflation or a crashing dollar?
There are various scenarios that could cause new bubbles to burst, some in a big way. Bubbles are deceptive and unpredictable, but by studying their histories we can try to avoid them, or at least limit their damage.
Here are a few worth watching:
Commercial real estate
Commercial real estate is facing multiple challenges, including the implementation of rules adopted under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Plus, a new accounting standard that would affect the refinancing process for commercial leases is under consideration.
These factors, along with the prospects for higher interest rates, could exacerbate existing market conditions and high valuations in many markets.
Commercial real estate is directly impacted by unemployment and prevailing wages. Service-sector industries and businesses are particularly sensitive to changes in disposable income. Putting additional pressure on commercial real estate, a sizable number of loans will come due over the next three years, including billions in shopping center loans that were financed at historically low interest rates. Declining values make financing hard to come by as lenders have sought reliable metrics that limit their underwriting risks.
The deep and prolonged recession has made it more difficult for properties to meet loan-to-value targets, as values have dropped. While financing may be more difficult, liquidity has improved as a result of the re-emergence of collateralized mortgage-backed securities.
Unless the job picture improves substantially, continued weakness in consumer demand could place commercial real estate in peril, especially those properties that are only marginally profitable. As with all real estate, the location of the property is a major factor in predicting price stability.
Athlete incomes
The sports world is no stranger to exorbitant salaries. Forbes evaluated the top 50 earners based on total income before taxes for the 12 months through April. The average income for this group was $28 million, which included base salary, bonuses, endorsement and licensing income, prize money and personal-appearance fees.
Sports teams and commercial sponsors believe it's worth paying huge salaries to stars like Tiger Woods and Kobe Bryant because of the value they bring to their respective sports. Wherever they go, fans turn out to see them play and buy the merchandise they endorse.
But what would happen if a double-dip recession caused attendance to drop and product sales to plummet?
The survival of sports as a business is largely dependent on fans having sufficient discretionary income. That's true of the entertainment and music businesses as well, so movie stars and concert performers could also take hits if that income deteriorates.
