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My personal musings about anything that gets on my radar screen--heavily dominated by politics.

2007-11-28

Economic Musings 

First of all, let me be the first to recognize that my background in economics is . . . weak.

That said, I'm pretty good with numbers, and I'm beginning to wonder a few things.

First of all, I still believe that the economy is chuggin' along pretty well. 2.5-3% growth in the GDP, unemployment below 5%, wages up, inflation low . . . everything is pointing a pretty good situation.

But I'm starting to wonder just how widespread the housing and credit problems are going to get. The news is not good.

U.S. home prices fell 4.5 percent in the third quarter from a year earlier, the sharpest drop since Standard & Poor's began its nationwide housing index in 1987 and another sign that the housing slump is far from over, the research group said Tuesday.

The index also showed that prices fell 1.7 percent from the previous three-month period, the largest quarter-to-quarter decline in the index's history.

How many times did people in your life in the last thirty years say to you "your home is your best investment"? I know I heard it a lot.

So what does it say that your best investment has lost significant ground in the last year, and its not looking to get any better any time soon?

On top of that, the credit problems have left a lot of people in need of refinancing/renegotiating their home loans--if the house isn't worth what the loan is worth, there's nowhere to go. What kind of long-term effect does THAT have?

And then don't you have to wonder about other debt? Think about this scenario: ten years ago, a family could accumulate significant credit card debt, but in a few years, when the combination of payments and appreciation made their homes worth more, they could refinance their mortgage and get rid of that credit card debt. That's not particularly an option these days, and that debt is going to cause its own set of problems as it weighs on families.

It's not that I'm a pessimist about the economy--with the little knowledge I have, I still think the picture is pretty good.

But the housing market problems have the possibility of rolling downhill with some momentum, which may effect a lot more than that one sector of the economy. I would guess that that's a fair part of why the Dow Jones is down more than 7 percent over the last six months (that, plus the price of a barrel of oil going through the roof), and why consumer sentiment is at its lowest level in two years.

And given the lack of actual reporting on the actual state of the economy, reports that keep coming out about the housing sector will have an even greater and greater impact on the consumer psyche.

So color me cautious. It seems to me like it would be a good idea for the GOP candidates to get out in front of the electorate with not just the strong numbers and a PR plan for getting that information out, but also an economic plan for containing the damage within the housing sector and for mitigating some of the damage therein.
Posted by: Michael / 11/28/2007 12:36:00 AM

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