The 2006 Economy: Boom or Bust?

With 2006 right around the corner, what's the prognosis for the economy next year? Will there be a boom or bust in housing, jobs and the stock market? And is inflation going to take a bite out of your wallet?

"Good Morning America's" financial contributor Mellody Hobson gives her predictions for the coming year.

Housing Market: Bust

It looks like the housing market is going to be a bust. The National Association of Realtors has just come out with a new report that sales of previously owned homes dropped 1.7 percent in November.

And there are other signs the housing market is headed for a slowdown in 2006. First, according to another new report, 65 of the nation's 299 biggest real estate markets are extremely overpriced, and are due for what experts call a "correction." In normal language, that means a steep drop in price.

Second, although mortgage rates did drop slightly this month, they have generally trended upward, and November rates were the highest of the year.

Finally -- and this may be the really big indicator -- fewer people are applying for mortgages. Mortgage applications fell last week to a 3½-year low. Houses are sitting on the market for a longer period of time. All of these factors point toward a cooling market.

Now, of course, that's good news if you're a buyer. Even the president of the National Association of Realtors is saying that next year will be a buyer's market.

Many people in the last few years have bought more than they can afford in real estate and have taken out extreme mortgages. As rates rise, some of these people are really going to get stuck, and we'll see a lot more inventory on the market driving prices down.

Jobs: Boom

The job market may be booming next year. There's some concern that a slowing housing market could hurt employment, but other signs point toward a positive year.

There were 215,000 new jobs created in November, compared to 44,000 in October. This rate of job creation should remain stable in December with an additional 200,000 new jobs predicted.

A new major employment survey found that nearly one in four (23 percent) employers expected to hire more workers for the first quarter of 2006.

And a new Federal Reserve survey found reports of shortages of specially skilled workers in some markets, including health care, finance and construction. This could be good news for those looking for work.

Stock Market: Bust

Let's look at the indicators. Rising interest rates are bad for stocks. Investors realize they can get lower-risk returns when investing in bonds when rates rise.

Corporate earnings are slowing because of rising rates and inflationary pressures like higher commodity prices -- not only oil, but everything from steel to sugar.

Year-over-year comparisons are going to be less favorable, because the last couple of years companies have been rebounding from such low levels.

Since the bull market after the bubble burst, we've already had a big move-up in the market. The S&P 500 recently reached a 4½-year high. Even the Dow Jones can't be counted out as it nears 11,000 again -- a level it hasn't seen since June 2001.

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