The fly in the ointment

[bubba99]

I have been expecting a complete meltdown of the economy as a result of the mortgage and subsequent housing decline. But what if the consumer stays in denial?

What if the average consumer just continues to spend and loads more debt onto the many credit cards at his/her disposal. If the spending continues, no earnings losses, nor job losses – except in construction. And construction job losses have not really impacted un-employment in a significant way.

The devaluation of the dollar helps with the balance of trade, and banks will clean up on the higher credit card rates (over HELOC’s). This must be why the banking sector is already recovering.

Government revenues will increase because of decreased tax deductions (cc vs HELOC).

The economy may be more self healing than any of us thought.

[Bugs]

Market psychology is definitely a factor in the economy. However, the reverse is also true. Baghdad Bob held to the party line for a lot longer than the underlying facts on the ground would otherwise have indicated. But eventually even he was forced into submission.

[hipmatt]

Are you forgetting a few things?

Home affordability is still very low.
Food, energy, and healthcare costs are skyrocketing.
Long term interest rates are rising.
Most of the goods that we buy from abroad will eventually cost more as the dollar falls.

I don’t see how this paints a rosy picture for the consumer, which this economy is based on.

[eccen in esc]

eccen in esc
You are right. Consumer denial plays a big part. And mainstream media is what is (mis)leading them. That is why sellers continue to insist on pricing high. Group consciousness is powerful and it takes a while for the truth to sink in.

[patientlywaiting]

The consumers have been spoiled rotten and they are loathe to cut back. They believe that Starbucks, brand name clothes, perfume, various knick knacks, a new car, eating out, beer and partying once a week are necessities of life.

I truly believe the consumers will let their upside down houses go before they cut back on the “necessities” of life.

[kewp]

I think the general argument is that the consumer will indeed keep spending, except it will be on higher mortgage payments and food/energy prices. There is just not going to be enough left over for that new H3.

[HereWeGo]

The consumer spending number for August was certainly on the high side, no doubt.

[kewp]

Oops, forgot to add, that home equity loans are going to dry up.

[Ex-SD]

Something that I learned many years ago when I was a young man and worked for a very large manufacturer of big ticket items………When inventory would grow too large, the prices would drop to whatever it would take to move he inventory. Years later, I moved into the retail sector as CEO of a very large chain of big ticket items and a wholesale distribution network of selling some of these products to other dealers in the USA and Canada……………Any time our inventory would grow too large, I would drop our prices to whatever would move it. It doesn’t matter if it’s homes, cars, widgets, etc…………When inventory is too high, prices will drop to the point that it will take to move the inventory. It is a basic fundamental of manufacturing, distribution and retail that this is the thing to do.

In the bubble markets around the country, we already have a much larger than normal inventory of homes………….. add to this…….. the lack of qualified buyers, requiring down payments, no liar loans, tighter restrictions on borrowers, higher mortgage interest rates, etc. and you come up with a recipe for very large price drops to get rid of the inventory. Some builders have already smelled the coffee in Florida and have held auctions where the condos and town-homes brought discounts of 50% from what other buyers paid a year ago. Stubborn sellers who have to sell for reasons of job loss, divorce, un-affordability, etc will have to chase the falling prices of REO’s that the lenders will need to clear from their books, etc. It only takes a couple of homes in your neighborhood that sell at greatly reduced prices to play havoc with the comps when the next person wants to sell their home. This mess did not happen overnight and it won’t clear up overnight.
All this is coming to a neighborhood near you………….very soon.

Patience, grasshopper!

[(former)FormerSanDiegan]

“The economy may be more self healing than any of us thought.”

This ought to cheer you up, then …
San Diego economic forecast looks ‘pretty bad’

http://www.signonsandiego.com/news/business/20070928-9999-1b28sdecon.html

[nostradamus]

I like the idea of a self-healing economy but how much can it take before it breaks down? What happens in the face of cataclysm, like a terrorist attack, a political scandal, or something positive like the capture of Osama?

[cr]

There’s only so much debt you can take on before even your minimum payment exceeds your monthly income.

It’s that or people die in debt. Then who pays for it?

[HereWeGo]

The creditors.

[Omega Point]

The consumer will keep on spending until he doesn’t have a job anymore. As long as the unemployment rate remains low, I do not expect consumer spending to slow down very much. And because we have a well diversified economy I do not foresee unemployement rising to high levels so consumer spending should continue to chug along.

Most consumers may be living paycheck to paycheck but as long as a paycheck is coming in, they’ll keep on spending.

[VanMorrisonFan]

There are some signs of slow consumer spending…of course, some of it is directly related to home sales. I understand that Home Depot is having a rough patch, and Macy’s and Target have reported leaner-than-expected sales figures. The anecdotal evidence is generally positive – the malls I have been to recently have been crowded, but it’s hard to tell if people are buying things.

[LookoutBelow]

J6P will spend until his credit card is rejected……I have NO faith in the restraint of the typical american, neither should you. Its not pessimistic, its reality …I offer the economy of the last 5 years as evidence to this.

This is going to start in earnest 1st qtr/08 folks and its going to be bad and get worse….it hasnt even started yet ….EVERYTHING is intertwined…..EVERYTHING.

There is no industry sector or avenue of commerce that WONT be greatly affected by the coming woes.

That is all. 

[Anonymous]

In the “San Diego economic forecast” link, did anybody catch the building permits statistic? For SFH it is a bit over 200 permits this year. Lowest since 1993.

I guess that’s “self-healing”. Almost no inventory is being added (or at least constructed). Now it’s a matter of time before the existing homes get sold off – or taken off – the market.

[NotCranky]

Warning the following is completely void of charts, graphs or numbers arranged in any fashion.

I have seen a theory posited that we are at our getting and spending top speed and spending less energy, which is not compensated finacially, raising children because of low birth rates and the wider use of paid child care.

An elderly friend of mine also pointed out the effect entitlements will have on the economy as compared to previous times. He was a kid in the depression.

We have a huge population of folks who are finished raising their children making money and recieving entitlements to spend and we have the younger generation having fewer and fewer children or putting it off until they are almost geriatric themselves(Like me and SDR).

Working to pay for child care dumps much more into the economy than quitting work and raising children.That Child care provider spends what you pay her. Obviously one makes above and beyond what chld care costs by going to work instead of staying home and thus more gets spent. We are much more into the two per household getting and spending mode than ever before with or without children.

Never in the history or getting and spending have so many been recieving entitlemenst. They certainly existed to a much less degree on the eve of the depression. Wether these entitlements eventually break this country or not is a different topic. For now they are being paid and spent.

Of course I am not saying this is going to cause the disappearance of housing bubble issues. These factors do seem to have some bearing on that, and the economic picture in general.

[Author]

Posts