Sunday, January 13, 2008
Economics, the housing market, and the coming recession
The other day my brother called me on the telphone to ask me an economic question. He asked, "Are we heading into a recession like all of the newpapers and news channels are saying?"
I answered with a quick, "No."
I explained to him that the unemployment rate has remained low for an incredibly long time. The unemployment rate is a strong indicator of a country's economic strength. When unemployment is high, the economy may be weak and hence its currency may fall in value. As long as it remains low, that means people are working, and buying goods. Of course, what keeps an economy moving in a healthy manner is the movement of goods.
The Stock Market has remained strong, with a few bumps in the road, but for the most part remaining healthy and breaking numerous records for volume trading in 2007. All of this, of course, comes to the surprise to those that wish to attempt to blame a poor economy on George W. Bush. Problem is, aside from the housing slowdown, the enonomy is strong, and apparently the tax cuts in 2001 and 2003 are a large part of the stable economy.
Wait a minute. Our media and lefty friends swear up and down we are heading into a recession. The economy is falling apart. The housing slowdown is screwing our economy.
Like our planetary temperature, the economy moves in cycles, rising and dropping on a continuous basis. The longer the period between fluctuations, the more severe the fluctuation. And the housing slowdown is no different.
When housing slows down, prices drop, and the Feds in order to attempt to keep order, drops the Prime Rate as well. Lower prices and lower interest rates, combined with a low unemployment rate, creates a buyers market with a surplus of employed buyers for first time home buyers, who tend to buy houses that have been standing for a while. This, then, results in a rise in "Existing-home" sales, which in turn stabilizes the market. And here's the thing; just because housing slows down in one part of the country, it doesn't mean the whole country is heading into a tail-spin. Even though housing has come to a crawl in Nevada, California, Arizona and Florida, it doesn't mean that new houses are not being built elsewhere.
As for those bad mortgages? Serves those consumers right. The bad mortgages were balloon-rate mortgages, which, after 5 years, blossom into a higher rate. Buyers receive these mortgages for the extremely low opening rate, hoping their income will rise enough to carry the balloon rate later when it arrives. Unfortunately, this type of budgeting is akin to gambling, and a lot of gamblers lost all at once this time around. So, now the greedy lending companies that gave these loans are going out of business, and a record number of people are losing their houses. The people out of a house, I am sure, have learned their lessons, and the houses being foreclosed upon are now being bought at a lower price by other consumers, allowing more people to qualify for a house, which in turn is beginning to stir the economy in a good direction.
In the meantime, the idiot Democrats truly believe our economy is headed for big trouble, and are proposing huge economic stumulus packages that will result in higher taxes, which will take money out of the pockets of the consumers, hence taking away their ability to buy as many products, which will slow down the movement of goods, which in turn will slow the economy and send us into that recession they think they are trying to avoid.