October 3, 2006

From “Nightmare Mortgages” to “Not Sweating the Housing Slump”

Filed under: Biz Weak,Economy,Taxes & Government — Tom @ 10:15 am

Biz Weak’s September 11 story (“Nightmare Mortgages”; link appears to be free for now) told the story of many homeowners who are in trouble because of signing up for Option ARM and other aggressive loans. There’s plenty of blame to spread around, from consumers not managing their loans properly, to mortgage brokers and lenders not matching products to their clients’ needs (vs. wants), to lenders sticking clauses into contracts, such as prepayment penalties, that limit borrowers’ ability to get out of the deal by refinancing.

Thought the article did not explore the potential impact on the overall economy, a reader could be forgiven for finishing “Nightmare Mortgages” with the impression that the housing market is going to come tumbling down, and the economy along with it.

Relax. Biz Weak’s October 9 issue says the opposite (link appears to be free for now):

U.S.: Consumers Aren’t Sweating The Housing Slump Yet
They’re coping, thanks to solid household finances and cheaper energy

The debate over the direction of the economy and Federal Reserve policy in the coming year boils down to one basic question: Will the housing slump drag down consumer spending and the economy? As you ponder your position on that issue, keep in mind that throughout this nearly five-year expansion, one bet has been consistently bad: the one against American consumers.

….. FOR NOW, CONSUMERS still have the winning hand. Although job gains have slowed, labor markets remain tight, and they are generating income at a rapid clip. Personal income in the third quarter is on track to grow about 7.5% from the previous year, a good deal faster than inflation. Also, consumer finances remain in good shape, with further additions to household net worth in the second quarter. Mortgage delinquency rates at banks, while up slightly from the year before, remain low, as do late payments for consumer loans and retail credit cards.

In addition, as gasoline and heating oil prices plummet, consumers are getting an enormous purchasing power windfall that is already boosting confidence, and it will lift spending in coming months.

….. homeowners are hardly suffering. True, the median price of existing homes declined in August by 1.7% from the previous year, the first such drop since 1995, says the National Association of Realtors. But consider that prices are up 22% from three years ago and 40% from five years ago. Those capital gains have added smartly to overall wealth, and it would take a draconian decline in home prices to erase them.
….. Clearly, the economy will not escape the downdraft from the housing market’s return to reality. The question is: How bad will it get? For that, look to consumers. If the burden gets too heavy, they will be the first to buckle. But so far, they are carrying the load very well.

If left-slanted Biz Weak really thought there would be big trouble because of the housing slump, they’d tell us. The fact that it can’t tell us the sky is falling is one of the better signs that the sky is really blue.

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