Friday, January 18, 2008

Economic considerations

The Commerce Department finally has those much-talked-about Christmas spending numbers. Consumers spend 0.4 percent less than a year ago, the worst consumer showing since June 2007, and that's accelerating fears of recession. We're not there yet, but many pundits believe we're about to be. Consumer spending accounts for approximately 71 percent of the gross national product. If the consumer doesn't spend, the country is headed for recession.

The question is: why are we surprised? Jobs are contracting; unemployment is up half a percent over a quarter ago. Housing is in a holding pattern with the first loss in home prices in decades, and gas prices at the pump have risen 10 cents a gallon in the last two weeks

Energy prices have finally impacted wholesale prices by a whopping 6.3 percent over 2007 -- the biggest gain in 26 years. And it's safe to say that consumers are already feeling it.
Tighter credit hasn't helped. Consumers are no longer able to turn their homes into ATMs unless they have lots of equity and good credit. What the impact will be for spring on the housing market is anyone's guess.

During the last mild recession following the technology stock meltdown and the horrors of 9/11, consumers surprised the economy by cocooning. They made buying a home a statement about needing to feel secure. If nothing else is secure, they want to be secure at home. Those homebuyers kicked off a six-year record-breaking run in housing.

However, unlike the previous recession, inflation is a greater threat this time. Mortgage interest rates aren't as likely to be as obliging as they were in 2002 when new record lows were reached. We're already close to those record lows now. Inflation risks are likely to cause the mortgage bond market to react, and mortgage interest rates will rise. Not by much, but they will rise.
That means homebuyers will need more convincing, particularly that they'll be financially safer in a different home. And that won't be easy to do in a rising interest rate environment. So, home sellers will have to step up to the plate with better prices, more improvements and other incentives. The other possibility is that people could stay put, afraid to make the wrong move. That also could impact housing negatively. Either way, housing is likely to be pivotal in determining whether the economy recedes or moves forward.


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