Sunday, September 10, 2006

Double Whammy

From the Asbury Park Press:

Falling home sales, rising jobless rate could be a double whammy for economy

WHEN THERE ARE MORE "home for sale" than "help wanted" signs, the U.S. economy may be mired in recession.

Most gauges are confirming that the housing market has hit the brakes and may be in a tailspin. Existing-home sales dropped a more-than-expected 4 percent in July and the number of unsold houses is the largest since 1993. New-home sales fell 22 percent from the same month last year. And construction spending fell the most in five years.

While higher mortgage rates and affordability concerns have been the bogeymen in the current U.S. housing decline, little attention has been paid to the combined demons of unemployment and adjustable-rate mortgages.
If job growth and consumer spending shrivel because of a meltdown in housing — an industry that has employed about one in 10 Americans since 2000 — then the trends could fuel each other and create a maelstrom for the U.S. economy.

There's yet one more gremlin: Not only is unemployment above the national average in the sourest housing markets, there are a lot of "subprime" adjustable-rate loans that are due to readjust and sock homeowners with higher monthly payments.
While buyers will see some heavy discounting if the current slump is prolonged, sellers should beware. More foreclosures put more homes on the market and sink prices further.


Anonymous Anonymous said...

This is a good article.

Pay particular attention to the section in the article "Loss of manufacturing".

"U.S. manufacturing joblessness has been worsening, as some 40,000 plants closed over the past six years, according to the AFL-CIO, the labor confederation. That translates into 1.9 million jobs lost, amounting to 17 percent of the manufacturing work force — 48 percent in textiles and 23 percent in machinery alone. Even industries that were thought to be strong are declining. Almost 30 percent of the computer and electronic-parts industry has lost employment."

For the new bloggers out there (the old hat bloggers have heard me say this before), in my opinion, I believe that it is this loss of manufacturing (mostly due to China) is the origin of the housing boom. This country is losing its manufacturing base. (i.e..we have nothing to sell.)

So, what is replaceing a decent middle class manufacturing jobs and incomes today?

Credit and credit cards.

This easy money credit policy has found its way into the housing market, which then in turn caused one thing to lead to another (cascade effect).

Also, credit cards are replacing incomes. Just think of how many people have made purchases without really having the income to back it up. How did they make that purchase?

The problem with this....
pretty soon someone has to pay the piper. and what you bought on credit for 1$, will actually cost you 5-10$ when and if you pay off that credit bill.

Another problem, when someone loans you money (mortgage & credit cards), they are constantly evaluating your credit worthiness.
And if you struggle or can't, you become a credit risk...

Trust me, the banks will know, way before you do, if your home drops below mortgage value. Because you are now a credit risk, perhaps you should pull out your mortgages and read the fine....very fine...prints.
IF your owe more on your house than its worth, why not just jump ship right? The banks are not stupid.

Now, if we have a wave of credit risks, someone has to help the banks and bail them out, because like I said earlier, its the banks and credit that are replacing decent middle class incomes.

So, who will bail out the banks if we have a wave of credit risk?
Yup, you guessed it. Your tax dollars. You pull more money out of the economey, what will that do to spending?....another cascade effect leading to a recession.

Recessions = job loss = drop in house prices = credit risks

I am tired of typing, but you get the idea. Bottom line: Its going to get ALOT worse, before it gets better and I hope you are preparing yourself.


9/10/2006 06:59:00 AM  
Anonymous Anonymous said...

One other note:

This easy money banking policy has lead to banks and mortgage lenders to come out of the woodworks.

What does this mean?

Because these guys pop out of the woodworks, it creates competition.
Tough competition is not always good, because it tends to make people cheat and do unethical things just to stay "competitive".

Once the housing bubble smoke clears, I think we will see some scandals on the scale of Enron.


9/10/2006 07:19:00 AM  

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