The Housing Market and the Economy
Aug 26, 2010
Posted by Jody Eisenman | Filed under Uncategorized
There has been much talk lately of a “double dip” recession. What this means is that although the economy has appeared to come out of a decline, the reality is that we are slipping back into the abyss. An unemployment rate which has remained quite high (currently 9.5%) adds to this theory. However, the real issue is the housing market. The housing markets’ initial decline led to massive losses when investment banks leveraged themselves and many of their clients into exotic products that few really understood. This has been discussed here several times. However, the bulls on the economy have felt that housing prices would rebound, leading to an overall rebound. Unfortunately, this is not the case.
Numbers released this week indicate that home sales are declining at a rapid rate. July home re-sales were expected to show a decline of 13.4%. Instead, the actual number was a staggering decrease of 27.2%. Over the past year, housing sales have plunged over 25%. This has occurred despite the fact that mortgage rates are at their lowest level in decades. Why the steep decline? After all, don’t home owners recognize a bargain when they see one?
There are two issues. The first is, after an unprecedented period of spending, consumers are now turning cautious. Most people I know are cutting back on their lifestyles. After all, with a stock market crash in 2008 and an uncertain job market, do people really need a 50 inch plasma TV, or expensive season tickets to your local sports team? The second reason is the incredible glut of inventory. With foreclosures are extremely high levels, banks are sitting are huge inventories of houses. In addition, many banks are not foreclosing on homes under water (meaning that the mortgage due is worth more than the home itself) because
They have already had a huge inventory of homes they can’t sell.
They feel they would do better if they allowed the borrower more time by restructuring their loans. Of course, this has not worked out the way the banks planned: http://www.jodyeisenman.com/2010/08/the-mortgage-refinance-relief-mess/
Overall, the stock market has performed poorly. Since August 9, the Dow has declined from 10,700 to about 10,000 now. I would expect the Dow to have some sort of a bounce up here, (as has been the pattern all year), but continued poor economic numbers could really hurt growth going forward.
