Posted on 08/18/2007 3:41:54 PM PDT by Tolerance Sucks Rocks
WASHINGTON -- Pessimism is a contagious affliction, born by fears of some cataclysmic result that is based on little or no compelling evidence -- usually in the face of a pile of facts to the contrary.
That's the illness that spread through Wall Street last week, triggered by the continuing turbulence in the housing and credit markets amid fears that the situation is only going to get worse and drag the rest of the economy down with it.
Some of the gloomiest traders on Wall Street have begun, once again, to talk about a recession, the dreaded r-word that rears its ugly head whenever the stock markets go through their usual corrections -- which is what's happening now.
Cooler heads advise that, for the time being, the housing troubles have not spilled into the economy at large. That's because the fall in home sales and the concurrent collapse of the subprime-mortgage market represents a small fraction of our $13 trillion-per-year economy.
This is not to say the credit crunch can't get worse. The torrid housing boom of the past several years led to a frenzy of irresponsible mortgage schemes by lenders who offered little or no interest or no-down-payment deals, and short-term adjustable-rate mortgages, to poor credit risks.
Thus far an estimated 20 percent to 30 percent of them have fallen through, and that could go higher when interest-payment resets kick in over the next two to three years. The implosion of these types of loans has dried up the money flow to lenders, forcing the Federal Reserve Board to provide additional liquidity to the banking system during this rough patch.
But this still begs the question: Does the housing credit crunch endanger the larger economy? The evidence suggests it does not. Indeed, there's a mountain of evidence that the economy is stronger, despite the temporary housing illness. A few examples:
-- The economy, in the middle of the subprime mess, grew by a strong 3.4 percent in the second April-June quarter, driven by stronger consumer demand, increased exports and an uptick in manufacturing output.
-- Employment continues to rise during this period, with the jobless rate now at a low 4.6 percent rate. More Americans are working now than at any time in our history, while wage growth has rebounded.
-- A large decline in the cost of gasoline prices last month helped hold down consumer prices to their lowest level in eight months. Prices rose by a mere 0.1 percent in July, and the core rate of inflation, excluding volatile energy and food, has risen a tame 0.2 percent for the past two months.
-- The big news from a key sector of the economy: The Fed reported that industrial output rose by 0.3 percent last month, following a solid 0.6 percent rise in June. July's increase was fueled by a 0.6 percent rise in manufacturing, the second consecutive increase at this rate.
"Analysts believe U.S. factories, after being hit by a slowdown late last year, are starting to revive the economy in spite of continued troubles in the housing sector," Associated Press economics writer Martin Crutsinger reported last week.
Stronger global growth is a big factor behind the faster pace in factory output. We are selling more abroad and that, the government reported this month, has been driving down the trade deficit.
-- Another sign of the economy's health is last week's report that the budget deficit is falling faster than expected. Tax revenues have been flowing into the Treasury at higher-than-forecast levels as a result of growing employment and rising corporate earnings.
-- There's even a bit of hope that the housing sector's sales decline may be primed for an upturn, according to a report from the National Association of Realtors.
"Although home prices are relatively flat, more metro areas are showing price gains with general improvement since bottoming out in the fourth quarter of 2006," said NAR senior economist Lawrence Yun. "Recent disruptions will hold back sales temporarily, but the fundamental momentum clearly suggests stabilizing price trends in many local markets."
Notably, the NAR survey found housing price increases in 97 out of the 149 cities it surveyed, or about two-thirds of the market. In other words, the bottom is not falling out of the housing market.
The underlying reality in the housing market is that most homeowners have experienced "very healthy long-term gains," said NAR president Pat Combs. So, the pessimists on Wall Street notwithstanding, the U.S. economy is sturdy, resilient and growing. Over the long term, I don't think the housing downturn is going to fundamentally affect that trend.
Donald Lambro is chief political correspondent for The Washington Times.
PING!
This from one of the groups that pushed the sub-prime lending market. SURE?????
Until we get a Democratic Socialist in the White House, who will sign a massive tax increase into law. They never learn.
As org.whodat suggests, it's a pretty dumb practice to cite "experts" like Yun, who have a vested interest in having the housing boom continue. Much like the Iraqi Information Minister in 2003, such people have a nasty tendency to express what they want to see, not what is actually happening.
Contrary to Lambro's assertion that we're "in the middle" of the subprime mess, if you look at the scheduled interest rate resets over the next couple of years, we're just getting warmed up. And "Alt-A" mortgages (equally foolish "interest-only" and "option ARM" loans) are next. As large numbers of borrowers face increased mortgage payments, and find it harder to sell their homes due to oversupply and tighter lending standards, IMO it's very possible they're going to cut spending in other places, which could harm the economy. The question is how much damage will occur - and by focusing only on rearward-looking economic indicators, Lambro has basically said nothing.
By the way, I'm neither an economist nor a psychic, but I do believe that anyone with Lambro's level of certainty is either a liar or a fool.
Our economy is far too diverse for most single things to *cause* a recession. But a single thing might *trigger* a recession, when circumstances are correct.
What is really threatening a recession right now are a handful of different things, all coming to a head one way or another. And each of them will have greater or lesser impact when the time comes for their correction. Here are some of them:
1) Unregulated hedge funds controlling the majority of daily stock trades. Unregulated *anything* with that much power almost guarantees an eventual disaster. This is why we have a SEC in the first place. In turn, it has been obvious for years that the SEC is only a fraction of the size it should be, a flea trying to regulate an elephant.
2) The SEC again figures in to the next problem by not regulating existing law, the most egregious example being their lack of enforcement against the practice of “naked short selling.” This has destroyed perhaps hundreds of small businesses in the US, which affects our economy is several bad ways. However, the SEC has finally been forced to enforce the law:
Granting relief to hundreds of thousands of “penny stock” investors and the businesses they wish to invest in, come October 15 of this year. That is, IF they decide to enforce it, and not just say that they are enforcing it. It could also lead to civil and even criminal actions against hundreds of individuals brokers.
3) The Chinese problem. China’s overheated economy and unwillingness to float their Yuan currency is such an obvious problem that both our and their economists see trouble ahead. Their government has tried some mitigation to lessen the impact, like adjusting the value of the Yuan closer to reality, but it is very hard to tell how bad the situation is, and how quickly everyone must act.
More than anything else, China lends a brittleness to Asian economies, which may make it harder to stop a downturn when it happens. But the rest of the world may have had time to set up some protective barriers to both limit the impact and to take some of the edge off the Chinese downturn.
4) Credit, value, debt, real and imaginary money. For a long time, the focus has been on credit and debt and their impact on both the US and international economy. However, the actual value of what is being traded has been inflated beyond reason.
For example, a typical new house may result in credit to the homebuilder and debt to the home buyer of $700,000. But what if the house is really only worth $200,000? This creates $500,000 of what I call “imaginary money”. It often behaves like “real money”, but it has no basis in value.
The vast majority of money in the US and international economies is imaginary, not real, money. It is the substance of economic “bubbles”, from Dutch “Tulip mania” in the early part of the 17th Century, to the recent “Dot Com Boom”.
An economy is stable when prices and values fairly reflect each other in the markets. And when prices wildly exceed real value, based upon objectivity, not “what the market will bear”, a bubble exists, and must eventually correct.
In the case of the housing market, hyper inflated house prices have existed for years, with an increasing number of props and gimmicks to avoid the obvious problem: houses are being sold at far more than their real value.
Since the market in houses can’t adjust because homebuilders refuse to lower their prices for the same product to compete, eventually the market will have a major correction.
Sub Prime mortgages may be the trigger that causes this, or not. But eventually either home quality has to rise to meet the price, or the price has to drop. And quite possibly because people no longer have the money to buy inflated value homes.
I saw a cartoon where a potential 17th century buyer of a new "super bulb" was being assured by the sellers that they "had a model" which indicated it was well worth its lofty price... the next picture showed much more modern garbed buyer and sellers spinning the same tale about a CDO!
There is nothing new in the basic game plan of scamming and pyramiding sales downward to the "greater fool" (including..., eventually running out of greater fools to sell to!)
I think he is both.
Contrary to the press, the oversupply of loans extended beyond subprime market. There are lots of people with good credit and good income who got loans for investment property based on future appreciation and phony rental income. Now they have negative cash flow (paid with their good jobs) and home equity loans due with no equity against the loan. On the bright side there will be uptick in productivity as those people work harder to keep their jobs.
The imaginary money is a good way of putting it. There are lots of people using their paper gains to fund their home improvements which will have limited or no payback when they try to sell. When that fact gets more apparant, the home improvement market will tank (Home Depot has peaked already).
Loan tightening equals home buying slowdown.
Home buying slowdown equals construction slowdown.
Construction slowdown equals trouble, higher unemployment, transportation slowdown in material goods.
Corn conversion to ethanol resulting in higher prices for a lot of things — corn, milk, chocolate, gasoline.
I’m not convinced we are NOT headed for a downturn.
You gotta look on the bright side...rentals will be up!
;o)
But is certainly has caused a large amount of panty-wadding, as special interest groups all across the spectrum look for government funding and new rules; isn't this how we lost the 2006 election?
>Our economy is far too diverse for most single things to *cause* a recession. But a single thing might *trigger* a recession, when circumstances are correct.<
There is not many industries that employ as many various other industries to stay in good health as the housing industry does. We don’t live in unfurnished houses, do we?
As I look around from my home office desk, front room and yard I see products from many industries. Furniture, carpet, paint, wood and steel doors, sheetrock, paint, aluminum window frames, glass, clocks, lamps, file cabinets, picture frames, desks, couches, chairs, a security system, a sound system, TV’s, DVD recorders, telephones, decorative shelving, the safe, computers, a printer, flowers, bricks, plants, the power transformer, lawn sprinkler system, vehicles, fencing, bicycles, concrete, asphalt, fire hydrant, etc.
That short list alone is 35 different items representing 50 different manufacturing companies. That is what I would call diversity and I haven’t walked through the rest of the house yet which probably would represent another 50 different companies.
Then when you add in the various shipping systems, air, rail, ocean, long distance and local trucking and the various companies they need to keep them operating we are looking at what 50 more industries?
This single “housing” industry keeps millions of people working to supply it. I am going to guess probably 1/3 of our economy is connected in one fashion or another to the single “housing” industry.
So a slow down in commercial and residential building is going to have a financial effect on at least 1/3 of our economy from where I sit. Depending on how quickly the world markets settle down again, I think this could *trigger* a recession.
Careful money management will determine the depth, width and length of a recession. That requires politicians who have our trust. Politicians whose word we believe and unfortunately there isn’t many of those waiting in the curtains these days.
Your argument applies most of all to the new home industry. In truth, it should include new homes, existing home sales, remodels and improvements, full equity, mortgage equity, and even rentals. All of them need home furnishings, etc., as well, and most of them have not been directly touched by this credit bubble.
Right now, the biggest affected segment are the credit markets that offered home loans to bad risks. And while the sudden downturn in credit will affect new and existing home sales, the downturn will mostly be because of too much product in the market for the normal good credit risks who still want to buy homes.
That is, the downturn should only return the market for new and existing homes back to where it should have stayed in the first place. Those most punished will be those who tried to “ride the bubble”, with overproduction and offering credit where none was due.
The optimum result is that the price of new and existing homes should drop to more value based levels from the speculative levels they have been at for decades. People with more money will want better quality in their homes, wanting to live there instead of using them for speculative appreciation.
Importantly, those with good credit will still want better quality homes, and be willing and able to pay for them, so this will mitigate the collapse of the balloon.
Hopefully, too, many of the props and gimmicks used to support inflated home pricing will die off or be outlawed.
>Your argument applies most of all to the new home industry. In truth, it should include new homes, existing home sales, remodels and improvements, full equity, mortgage equity, and even rentals. All of them need home furnishings, etc., as well, and most of them have not been directly touched by this credit bubble.<
What has been *directly touched* is sales of building materials, furnishings and all connected industries. The point I am attempting to make is that a downturn in these businesses will reflect into all of the connected industries.
If a large percentage of the men and women directly involved in the sales and contruction of lower priced, ie not jumbo priced, new homes are seriously damaged then every other industry that is associated is also damaged, just less seriously.
Since the majority of homes nationwide are this lower priced model, that represents a very large percentage of the economy.
Hopefully all of the people involved will still have funds to meet their daily expenses but they will not have the extra cash needed to continue feeding the growth in our economy.
Most small businesses operate with what I consider to be a small profit. They cannot sustain carrying employeess when sales are down for very long. That means all businesses could very likely be having minor layoffs depending on how long it takes for the shakeout to come to a settled correction.
Let’s hope that Wall Street and the other markets get back on track ASAP.
You should have said “Lower priced rentals will be rising.”
I think all developers in s.Cal should tired and prosecuted for ignoring the massive gridlock, while chasing profits.
Rental prices are skyrocketing.
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