Daily News

MBA Urges Regulators To Avoid Invoking Suitability Standards
The Mortgage Bankers Association (MBA) recently made a preemptive strike against what it obviously perceives as the next threat against the mortgage industry - "suitability standards." Read more...

 

How will the economy fare during the slowdown

The housing market effects many aspects of the economy, and many people are wondering what the slowing market is going to do to the financial situation of our nation.

Many factors are involved when determining the severity of any type of market slow down, such as interest rates, inflation and consumer spending habits.

Analysts across the country are becoming very concerned about the status of our economy in relation to the housing market.

An August 25, 2006 article by Lou Barnes of Inman News, “Economy allays fears of huge home-price declines,” gives some important data on the current status of the market and economy.

“Mortgages are stuck in a happy place, near 6.5 percent for the low-fee deals, the 10-year T-note's decline to 4.79 percent not enough to move the mortgage market. At the moment, this whole six-week decline in rates rests on the assumption that the housing market is in a progressive collapse that will soon take the whole economy with it. The bond-betting housing bubblers have one big risk: the only bubble may be in the froth on their own Kool-Aid. Housing is slowing, steadily and a lot (sales of existing homes down another 4.1 percent in July, unsold inventories to a 7.3-month supply, last seen in 1993), but slowing in the real economy is undetectable.”

Barnes is saying that although the market is slowing, there does not seem to be that big of a problem and everyone is getting worked up over not much at all.

Of course the market slow down is going to affect a lot of aspects of our financial status as a nation, the economy as a whole is still fairly strong.

A lot of consumer spending is based in the housing market, especially in terms of home equity. Home equity loans are a huge business in which you borrow against the equity in your home to get cash. This cash can be used for anything; from college to a lavish vacation. How you spend it is your choice, but you should always do so wisely. “The Fed thinks that it knows with some precision the net increase in consumer spending resulting from net extraction and spending of home equity. Absent outsized extraction spending, GDP growth in the last five years might have been suppressed by a percent or two, or perhaps enough to have kept the economy from crawling out of the 2002-2003 incipiently deflationary hole.”

“However, the economy is now out of that hole, growing nicely on its own momentum…maybe. Turns out that despite higher fixed mortgage rates and ARM rates, equity extraction continues, and nobody really knows why, or how stimulative the ongoing extraction is. My hunch is that extraction to date is only a small fraction of overall equity gain, 2001-2006, and may run for a long while after prices stabilize.”

If people know that there home is not gaining an value, they will not feel as “rich” and will therefore cut down as spending; this is known as the “wealth effect.”

“Pain, economic and otherwise, comes when large numbers of people can't get back the money that they paid into a house; severe pain sets in when large numbers of people can't get any money out; deep trouble arrives when the mortgage balances are larger than the sales prices.”

“Can that last happen to large numbers of Americans? Sure -- but it has not except in times of job loss and general economic distress. Keep the cart and horse straight, here: without economic distress from some other sector, housing in the used-to-be red-hot coastal zones and Southwestern desert is likely to enter a long, long flat spot, but not a crater. A drag on the economy, but not a killer.”

Back to Articles