Has anyone noticed that Bush Inc. has stopped saying that the economy is strong and getting stronger? According to Newsweek there’s good reason for refraining from such claims and switching to “Progress is being made in Iraq and things are getting better”.
The ripple effect of the housing bubble collapse is just becoming evident. You see, the housing market is the best place to have growth if you want to rejuvenate an economy. It creates jobs at all levels, from the retail clerk to the landscaper, the construction worker and management at major corporations. It ripples out to home improvement chains like Home Depot, electronic/appliance outlets and even plant nurseries as buyers make those final touches to personalize their new home. According to Newsweek almost half the jobs created in the last four years were a result of the housing boom. The boom is now bust and those jobs are going away. Lenders have closed offices, laid off staff and some have gone bankrupt. Builders are in the same position as housing starts are down 22%. The big national builders are closing offices, walking away from land purchases and taking huge write-offs sending stock prices down. Small local builders are even worse off without the resources of their bigger counterparts. As many as 120,000 job losses in the last year are attributed directly to the housing bust.
Even those not losing their jobs are affected. Real estate professionals working on commission have seen their income fall by 50% and in the worst hit areas only one in five agents are able to earn a living. The same is true of the remaining loan officers, bankers and brokers. Outside the housing industry the collapse is being felt as well. As the adjustable rate mortgages kick in and home values fall, decreasing the equity pool for borrowing to make big-ticket purchases, recreational spending is falling as well. The personal boating industry saw a 6% decline in sales for 2006 and expects a 10% decline this year. A local marina owner told me she had a two-page waiting list for slip rentals in 2001 and a 30% vacancy today.
Foreclosures in July were up 93% over 2006, which was up 50% over 2005 but the foreclosures of 2007 are different from before; now the crunch has reached the “good credit” loans and homes in the half million-dollar range are being foreclosed. It’s no longer just the sub-prime market and it isn’t getting better any time soon. This year the 5 year Adjustable Rate Mortgages made at the beginning of the boom will kick in, resetting the interest rates and increasing principal & interest payments by as much as 15% on the first increase. Most ARMs allow for a 1% increase per year with a cap at around 11%. A 6% $200,000 mortgage payment could increase by more than $2,000 a month over the next few years, going from about $2,000 to over $4,000 a month.
There is some help on the way. Fannie Mae and Freddy Mac will have lending levels raised so that those ARMs can be converted to fixed mortgages. FHA will have it’s lending level increased. These two moves will help about 80,000 of the 1.4 million loans in danger of foreclosure. The FED has relaxed rules allowing banks owning subsidiary lenders to shift funds to the ailing loan brokers so some of the hemorrhaging in hedge funds will ease. Some Democrats in Congress would like to see a government funded program to help lower income borrowers keep their homes, easing the crunch on the remaining sub-prime loan holders and the horse-is-out-of-the-barn crowd want to see closer regulation of the lending profession.
So, when you hear that the surge is working and progress in being made in Iraq remember that these are the same people who kept saying the economy is strong and getting stronger.
http://www.msnbc.msn.com/id/20546324/site/newsweek/
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