Rash-like skin reactions can be an early warning sign to stroke or heart attack – and treating the skin problems without knowing the underlying issue (the heart problem) would be a waste of time and likely not end in a favorable result. I know this well having lost my godmother under this scenario.
So when I see the President and Congress still trying to ‘resurrect’ the housing market thinking that this would be a catalyst for the economy, I get the feeling that we are treating the rash, not the pending stroke that many of these underwater homeowners fundamentally can’t afford to own ANY house, not just the one they are in.
Job losses, higher savings rates, and moral hazard are fundamentally shifting the credit market. Everyone who sells credit (banks, credit cards, etc) is rethinking how their customers will qualify for credit in the future. If more people foreclose and avoid paying debts, then it stands to reason that credit will be much more difficult to obtain (and is now so) in the future. The WSJ article linked above discusses a new program that would pay homeowners and lenders to short-sale their homes. Sounds neat doesn’t it? However, the reason this could be a disaster is that according to the article, there is over $1 trillion in equity loans and second mortgages. If banks had to actually REALIZE these losses on their balance sheets, we would potentially see many more underwater banks (they are actually currently underwater but they maintain their zombie status because they are delaying recognition of loan losses – ever notice how long it takes some banks to foreclose these days?).
In summary, economic weakness will continue to hit the housing market – simply a result, not a cause of retracting consumer free cash flow.
- In 2008-2009 the major credit card companies took back $1 trillion of available credit from consumers
- Unemployment currently is running at over 20% if you use real analysis (see www.shadowstats.com)
- Credit standards are tighter – A credit lending rates are for credit scores of 740 or above whereas in the past, lower scores got A rates – according to my sources
- Housing prices were historically too high – in a great article in 2006, Jeremy Grantham of GMO in Boston said that housing prices were riding at 6.3 times annual income on average where the long term average was closer to 4 – a trend he called “unsustainable.”
- Savings rates which were negative, are now running at about 4-5% according to research done by the major business newspapers.
Add all of these together – assuming consumption was about 70% of our economy, subtract 4% that is no longer being consumed by saved, subtract 3-4% for the loss of available credit card credit, subtract all of the home equity/2nd mortgage spending done on $50,000 kitchens and such which is now non existent, and add all of the other factors, and you can see why the economy is contracting, spending is down, jobs are lost and homes are foreclosing.
Instead of taking our lumps and telling people like it is so that we could get through this painful correction quickly (it would be quite painful) , policymakers have chosen to print and spend our way through this. As a result we may feel a nagging but not crippling pain for a much longer period of time – our own version of Japan so to say – of which we’ve already gone through 10 years of – we have already HAD OUR LOST DECADE. We are now on Lost Decade 2 – and like most sequels, this could be worse than the first.