Housing, Consumer Spending and Deep Crapola
This new Bankrate article states that mortgage rates are up sharply, and then points out that both demand and prices are down. Well, I certainly agree with their assessment so far, but my concurrence abruptly ends there... The article quickly moves towards weaving a positive spin on the situation and states: “We're going through a period of adjustment”, then later suggests: “the affordability crisis might be easing.”
It’s absolutely baffling to me… How can a positive spin be placed on this situation? Can’t people see what is happening? Don’t they understand that there are huge underlying economic issues causing the tide of events to turn, and that the fallout will be quite painful?
I personally see numerous reasons for the recent trend of housing price declines & increasing inventory, and these reasons are just beginning to have an impact on the market--the long term implications of a changed market are downright scary… Anyway, allow me to touch on a few of the reasons why we are begining to see a changing market: Increasing interest rates, rising inflation and high fuel costs are finally starting to impact the consumer, who is (like the Government) absolutely, positively, COMPLETELY BROKE!!! Not since the Great Depression has the American consumer had a negative personal savings rate… and it’s only going to get worse my friends.
As I have noted in the past, housing and consumer spending have been responsible for ~ 80% of our increase in GDP over the last 4 years. The housing boom provided a “wealth effect” in which consumers felt richer, and it allowed them to live beyond their means. Homes could and were being used as ATM machines, and the ever-increasing equity provided the monetary fuel for: taking vacations, getting a new car, buying that HDTV, new furniture, remodeling the kitchen, installing a pool, paying off the credit cards, etc… Life was great!
Now, with the housing market moving in the opposite direction, people will quickly find that they have no more equity to extract to pay for their lavish lifestyles, and they will finally have to pay the piper. Many folks (especially those who bought during the last 2 yrs) will end up upside down on their homes, and scores of them will chose to walk away from their homes & mortgages. The foreclosing banks will then take possession of these properties, but they too will be unable to unload the homes in a market already saturated with depreciating assets…. The banks eventually will have to accept huge losses and many will ultimately fail...
For homeowners that DO have large equity positions in their residences, they too will begin to find it too expensive to refinance, as their LTV ratios increase, interest rates increase and banks tighten their lending standards. Ultimately, millions of American consumers will have to reign in their spending, live within their means and increase savings.
So, what will that do to the U.S. Economy? Well, we’re already looking at higher fuel costs in the future, and depending on the fallout of IRAN and Nigeria, it could get much worse. When we combine the oil issues with much lower consumer spending and falling property values, I think we will see the economy contract hard, and the ramifications will be far reaching. Many employers will lay off employees as inventories increase; profit margins decrease, and stock values fall.
I personally believe we will enter a recession in late 2006 or early 2007, and depending on our Fed & Government decisions, I think we could be in very deep crapola by 2010.
If you want to read more about my feelings on these issues, see this link