My brother the accountant explained to me recently why he doesn’t think we will experience much, if any, of a recession this upcoming year. Because the housing market kept chugging along during the 2001-02 economic recession, the two markets can apparently operate independently and therefore the impending sub-prime crisis will not have much effect on the overall economy.
I tend to take a different view on the subject. I see the growth of the housing market, particularly through the economic slowdown of the first part of the decade, as more of a “trick” to continue the illusion of the US economy’s strength. Like delayed maintenance costs can make the bottom line look better than it really is today, only to cost more in the future, the low interest rates and relaxed regulatory enforcement allowed for continued housing market performance today, only to cost us more in times to come.
The payment of these tricks is coming due soon. And when it does, the economy will suffer. Just like refusing to pay for road maintenance will later result in ten times the cost for road replacement, so will social services cost more tomorrow for those people who lose their jobs, and their homes, when the housing market tanks. Prices are over-inflated, too many new homes have been built saturating the market, and equity will disappear for many parts of the country. As that equity disappears and the sub-prime mortgages reset, people who can’t afford the new rates will default as well as home equity lines will come due, and money will be sapped from the economy. This will lead to a recession, which will reduce hiring at least, if not shrink the job market, and people will be relying on social services to survive.
In addition, commodities are trading higher than ever, meaning that while people will have less to spend everything will be costing more. This crunch could exacerbate the problem further.
The federal government is looking into ways to alleviate the sub-prime crunch, but this is a bad idea. Letting the market correct itself will be painful, but interfering in the market will only lead to bigger problems. Hold on tight, and we will all weather the upcoming downturn. It is a natural market cycle so let it run its course. There will be upswings again, just be ready for it when it comes.
