WASHINGTON, DC - In an effort to take a comprehensive look at the U.S. real estate market and its effect on our economy, U.S. Senator Jack Reed (D-RI) and his colleagues on the Senate Banking Committees Subcommittee on Housing today held a hearing on The Housing Bubble and Its Implications for the Economy. During the hearing Reed questioned housing industry experts and leading economists about the state of the housing market and the perils of a possible housing bubble. What happens to the housing sector and home prices is of enormous concern to ordinary Americans for whom their house is by far their most important source of wealth, said Reed, the top Democrat on the housing subcommittee. It is also a concern for the people in the construction and real estate businesses whose livelihood depends on the health of the housing sector. And it is a concern for the overall economy. In 2005, the housing sector directly contributed more than $2 trillion to the national economy, accounting for 16.2 percent of the economic activity, according to testimony from the National Association of Realtors. What we are seeing now are clear signs that the housing boom is cooling off, and what we would like to explore in this hearing is how this process is likely to play out, stated Reed. Will there be a smooth economic adjustment to a housing market with a slower pace of homebuilding and house price appreciation? Or will the popping of the housing bubble be accompanied by serious economic disruptions and flat or even falling house prices? A wide range of recent data points to a distinct cooling in the housing market. Residential investment peaked in the third quarter of last year and has declined since, directly lowering economic growth. In the second quarter of this year residential investment fell at a 9.8 percent annual ratethe largest quarterly decline in more than a decadeand directly shaved 0.6 percentage point off the economys overall growth rate for the quarter. So far we have not seen a collapse of house prices, although the rate of price increase has slowed dramatically. After rising 12.9 percent in 2005, the median price of existing homes published by the National Association of Realtors, rose a scant 0.9 percent over the 12 months ending in July, noted Reed. A striking regional feature of the slowing appreciation of home prices is that the recent slowing has been most pronounced in those states that, between 2001 and 2005, had experienced the most rapid rates of appreciation Of the seven states (including Washington, DC) that saw more than 80 percent appreciation over the 2001-2005 period, only Rhode Islands appreciation rate has picked up over the last year. By the same token, prices in states that experienced relatively limited appreciation over the 2001-2005 period have generally seen only modest decelerations. I hope that the economy can make a smooth transition to a more sustainable pace of housing activity and house price increases without going through the turmoil that is often associated with the bursting of an economic bubble. But I worry that the economy may be headed for a bumpy landing, concluded Reed. As long as the Bush Administration refuses to take any serious action to address other challenges in the economy -- especially our fiscal and trade imbalances, we cannot count on stronger business investment or an improving trade balance to offset the loss of housing-based spending.