Why the Question Mark After the “R” Word?
We Americans hold the great bulk of our national wealth in residential real estate. We live in our piggybanks and save nothing. When housing values are stable or rising, we feel wealthier and more confident in our borrowing and spending, which accounts for 70 percent of GDP.
Inflation is a familiar environment but when housing values sink, what then? The opposite of gently benign inflation is deflation, a deadly phenomenon that almost killed the American Dream in the 1930s’ Great Depression and modern Japan for a dozen years through the late 1990s.
Most of us have never experienced anything like today’s emerging deflationary economic environment. Because of the unique piggybank role residential housing plays in our lives, the decline of prices and the suddenly crushing burden of debt that affects our entire consumer-centered economy.
U.S. home ownership hit a peak in mid-2004. Since then, mounting mortgage loan defaults and foreclosures have driven housing prices steeply lower, at first in the once red hot Sunbelt markets in Texas, Florida and California, and now nationally. The Federal Housing Administration reports that the homeownership rate is falling in the longest decline since this statistic was first reported in 1980. Sales of new and existing houses combined are declining at the sharpest rate in twenty-five years.
These bleak statistics, gathered by the astute analyst David Kotok of Cumberland Associates of Vineland, New Jersey, point clearly to recession. The reverse “wealth effect” will choke off discretionary consumer borrowing and spending as the housing cycle continues downward and its effects ripple outward. Adjustable mortgages made since 2004 are automatically resetting at an average of two percentage points above the initial rates, further depleting consumer disposable income.
Housing represents such a large portion of America’s consumer assets – a whopping $21 trillion – that even a very modest deterioration in this sector will have far-reaching effects. Kotok’s warning minces no words: “The accelerator is to the downside and there is no (housing) bottom in sight. That means risk is increasing every day as this asset class shrinks in value.”
On November 8th, 2007, we were given authoritative warning that a recession is here. Using strong language, Federal Reserve Chairman Ben Bernanke, testifying before the Joint Economic Committee, said: “…Financial conditions had improved somewhat after the September FOMC action, but the market for nonconforming mortgages remained significantly impaired, and survey information suggested that banks had tightened terms and standards for a range of credit products….Overall, the Committee expected that the growth of economic activity would slow noticeably in the fourth quarter from its third-quarter rate. Growth was seen as remaining sluggish during the first part of next year….”
Are there any questions? I think an obvious one is why are we stuck in denial mode?
Most of us have never experienced anything like today’s emerging deflationary economic environment. Because of the unique piggybank role residential housing plays in our lives, the decline of prices and the suddenly crushing burden of debt that affects our entire consumer-centered economy.
U.S. home ownership hit a peak in mid-2004. Since then, mounting mortgage loan defaults and foreclosures have driven housing prices steeply lower, at first in the once red hot Sunbelt markets in Texas, Florida and California, and now nationally. The Federal Housing Administration reports that the homeownership rate is falling in the longest decline since this statistic was first reported in 1980. Sales of new and existing houses combined are declining at the sharpest rate in twenty-five years.
These bleak statistics, gathered by the astute analyst David Kotok of Cumberland Associates of Vineland, New Jersey, point clearly to recession. The reverse “wealth effect” will choke off discretionary consumer borrowing and spending as the housing cycle continues downward and its effects ripple outward. Adjustable mortgages made since 2004 are automatically resetting at an average of two percentage points above the initial rates, further depleting consumer disposable income.
Housing represents such a large portion of America’s consumer assets – a whopping $21 trillion – that even a very modest deterioration in this sector will have far-reaching effects. Kotok’s warning minces no words: “The accelerator is to the downside and there is no (housing) bottom in sight. That means risk is increasing every day as this asset class shrinks in value.”
On November 8th, 2007, we were given authoritative warning that a recession is here. Using strong language, Federal Reserve Chairman Ben Bernanke, testifying before the Joint Economic Committee, said: “…Financial conditions had improved somewhat after the September FOMC action, but the market for nonconforming mortgages remained significantly impaired, and survey information suggested that banks had tightened terms and standards for a range of credit products….Overall, the Committee expected that the growth of economic activity would slow noticeably in the fourth quarter from its third-quarter rate. Growth was seen as remaining sluggish during the first part of next year….”
Are there any questions? I think an obvious one is why are we stuck in denial mode?
Recent Posts
- Iraq War Costs $5,000 a Second, Claim Democrats, Lining Up Against McCain
- The Next President’s Agenda: Deflation, Recession and Recovery
- Straight Talk for McCain – Your Numbers Don’t Add Up
- Pennsylvania: Bad News For the Democrats
- For Clinton – A Single Digit Win Won’t Cut It
- McCain Clear Winner of Bitter Debate
- John Crudele: Right on the Money
![[RSS]](http://67.192.49.194/templates/images/rss_icon.gif)
Subscribe to RSS feed
Post A Comment