Economic sign of the times; what will our future hold?
I think many of us are keenly aware of the fact that consumer spending and the US housing industry have been responsible for 90% of GDP growth over the last 4 years, and over two-fifths of all private-sector jobs created since 2001 have been in the housing-related sectors, such as construction, real estate and mortgage broking.
Understanding these facts, what happens when consumer spending slows or the housing market cools off. Well, I believe we'll find out soon enough, as cracks are already beginning to appear in the economic façade.
Some of the issues coming to light:
Negative Consumer Savings
Credit Card Delinquencies
Consumer Borrowing Slowdown
Home Loan Applications Fall
Rising Home Inventories
Inverted Yield Curve
Consumer Savings is at its lowest level since The Great Depression
Americans are spending everything they're making and more, pushing the national savings rate to the lowest point since the Great Depression.
The Commerce Department reported Monday that Americans' personal savings fell into negative territory at minus 0.5 percent last year. That means that people not only spent all of their after-tax income last year, but also had to dip into previous savings or increase borrowing.
The savings rate has been negative for an entire year only twice before — in 1932 and 1933 — two years when Americans had to deplete savings to cope with the massive job layoffs and business failures caused by the Great Depression.
Credit Card Delinquencies are At All-Time High (this occurred before minimum payments were doubled)
The American Banking Association reports that credit card delinquencies were at an all-time high in the second quarter of last year, which ended in June. The report showed that delinquencies were 4.81 percent. In the fall, delinquencies came down a bit to 4.74 percent. The ABA said that high interest rates and high gas prices have contributed to so many people falling behind. More delinquencies usually mean more bankruptcies.
Bankruptcies At All-Time High
Consumer Bankruptcies hit a new record in 2005—over two million people filed for bankruptcy--up 32% from 2004
Mortgage Delinquencies on the rise in California (a catalyst for Nation-wide trend?)
The number of default notices sent to the state's homeowners is up 15.6% in 2005's last quarter from a year earlier.
Lenders sent 14,999 default notices to California homeowners from October through December, according to DataQuick Information Systems. All areas of the state saw a rise in delinquency notices. The counties with the largest annual percentage increase in default notices were Napa, San Luis Obispo, San Francisco, Riverside, Orange and San Diego. The fourth-quarter total represents a 19% increase over the 12,606 notices sent out in the third quarter and a 15.6% hike over the 12,978 notices sent in the same period in 2004, the La Jolla-based firm said.
Consumer borrowing slows to a 13-year low
Consumers, weighed down by high debt loads and low savings rates, increased borrowing last year by the smallest amount in 13 years, the Federal Reserve reported Tuesday. The government said that borrowing on credit cards, auto loans and other forms of consumer debt rose by 3 percent in 2005, down from rates above 4 percent in the previous three years and a 7.7 percent surge in 2001. It was the smallest increase since a 1 percent rise in 1992.
Home Loan Applications Fall 2nd straight week
U.S. mortgage applications fell for a second consecutive week, led by a decline in home purchase loans, as interest rates hit their highest levels since early December, an industry trade group said on Wednesday.
Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.25 percent, up 0.05 percentage point from the previous week‘s 6.20 percent, marking their second consecutive weekly increase. Rates were at their highest levels since the week ended December 9, when they reached 6.28 percent.
Refinancings also decreased as a percentage of all mortgage applications, falling to 42.1 percent from 43 percent, the MBA said.
As mortgage rates started climbing in September, the market began to cool, and recent economic data has pointed to sustained slowing in the sector.
The U.S. housing market will cool this year as rising mortgage rates dampen home buyers‘ demand and lead to lower sales volume, smaller house price gains and a decline in construction, Freddie Mac (NYSE:FRE - news) Chief Economist Frank Nothaft said in an interview on Wednesday.
Home Inventories Rise as Housing Market Cools
With the key spring selling season about to get under way, the inventory of homes on the market is climbing sharply in a number of major cities.
It is the latest sign that the balance of power between buyers and sellers is shifting as the once red-hot housing market continues to cool. The slowdown is affecting both existing homes and new homes. Tuesday, the nation's largest builder of luxury homes, Toll Brothers Inc., reported a 29 percent decline in new orders in its first quarter, which ended Jan. 31. That was below many analysts' expectations and prompted a sharp sell off in Toll Brothers stock.
The Yield Curve has fully inverted
Historically an inverted yield curve has often signaled an economic recession six to 12 months after the yield curve has inverted, though many analysts are skeptical the current inversion is sending ominous signals.
I believe when we add up all these signs, they begin to tell us “all is NOT well”. If we then add in outsourcing, the loss of jobs at Ford, GM, Delphi and others, Union and Bankruptsy issues with the airline industry, our record Trade Deficit (just released), and the current predicament with IRAN and OIL, the picture gets even uglier.
I believe our economic house of cards is starting to show fundimental weakness and will soon begin to fall around us. Three years from now, when our economy is struggling, many will say “How could this happen?” “It was supposed to be different this time?” “Why didn’t we see this?”
What are your thoughts on the issue?