A recession... because of the housing market?

It seems that now time has passed by... many more economists are predicting a recession because of the housing market.

An example?

Look at the Time article.
Time Article

Why the Fed is a Cutter...

As reported by CNN in their recent article about the Federal Reserve, "Bernanke and Co." have decided to cut the Federal Funds(i.e. the rate at which the Central Bank loans money to other banks) rate by a quater of a percent to reach a new target of 4.5%. While this new cut may seem minor to us ordinary citizens, the Fed hopes that this (combined with its earlier and largely symbolic rate cut of September) is the jolt our economy needs to get out of its slump.
If the housing market continues to slow the economy down considerably, especially running into December's holiday season, the Fed may consider cutting rates once again in December.

Federal Funds rates, for those not in the know, have a large say in how high interest rates rates are for both indivual consumers and also larger corporations.

However, the Fed's actions have not been unseen by critics who fear that such steep actions could plumment the already troubled economy into a deep abyss of inflation.

Only time will tell....

-Dr.Econ

Bank Runs - Again?

According to BBC, the US housing crisis officially hits Europe. It is estimated that customers of England's Northern Rock bank have pulled out over 1 billion pounds on the first day alone, which is 5% of the bank's overall deposits. The run, which began on Friday, September 14, formed as a result of strained money markets over the summer. Over 250 of its loyal 1.5 million depositors lined outside, causing Northern Rock stocks to drop 30 some percent.

But what does this have to do with the United States?

Because of the US subprime crisis, American money markets have stopped lending to Northern Rock banks. Of course, money market investment is the banks primary source of monetary transaction and funds its substantial mortgage loans. As money flow within the bank slows to a trickle, customers become anxious about their deposits, which are currently backed by endorsements from the Bank of England.

Now, in the United States, the money market is strongly influenced by Fannie and Freddie, two of the nation’s biggest mortgage companies (uh oh). Freddie Mac and Fannie Mae are government sponsored enterprises who “help” loaners and homebuyers manage mortgages and are known for their corrupt methods of retaining GSE (Government Sponsored Enterprise) status. I've provided some information on these companies below:

* No direct competition.
* Receive annually 2 billion in benefits in corporate welfare
* Use benefits to fund a high-powered public relations and lobbying machines.

When the housing bubble collapsed, almost all of Freddie Mac and Fannie Mae's subprime bonds were virtually unaffected and were still ranked exceptionally high by June. However, the holdings of other companies were seriously crippled, leading analysts to believe that these government-chartered companies were protected from losses by (who else?) the government from loan failure.

Of course, Congress has already declared war against predatory loaning, so I wonder how FM and FM can remain in a positive light while still exploiting mortgage seekers.

-- Dr.Econ

Credit a Problem? Not with Unscrupulous Lenders

Do you live in the United States?
Does your heart beat 30+ times a minute?

If you answered YES to the above questions, you could be able to qualify for a subprime mortgage, the very same mortgages blamed for the 2007 housing "crisis." Of course, that may mean nothing to you, but such loans are blamed for the recent spike in sales plummets, defaults and foreclosures. Many people are threatened with repossession as adjustable-rate mortgages reset, leading many analysts to ask "What’s next?"

Since early 2006, The Mortgage Lender Implode-O-Meter has been rapidly rising, which reflects the increasing number of major US mortgage lenders "imploding" as more and more companies are forced to deal with decaying household finances. Depending on a person's credit score, he may qualify for mortgages of a certain rank. B-paper loans, also known as subprime loans, are offered to homebuyers who's credit score are below 620 (which is not sufficient for an A-paper loan). Although B-paper loans do not counterbalance the problem of deficient credit histories, their rates are often higher and they are considered risky for both the lender and the borrower. Check out my self-proclaimed "unscrupulous lender equation" that I believe is responsible for our housing recession:

The First Law of Unscrupulous Loaning:

High interest rates + Bad credit history + Borrowers of dubious financial security = YOUR SCREWED

Along with your lenders and the housing economy as well.

However, many mortgage companies are also accused of predatory lending techniques. Predatory lending consists of companies offering loans to individuals who they know do not qualify. Obviously, these borrowers could never pay back their mortgages, which allows predatory companies to take advantage of the rising number of defaults, foreclosures and repossessions in the United States.

But what does this portray about the economy?

The US housing bubble blames subprime and adjustable rate mortgages for its demise. The monthly interest rate increase for these mortgages are based on several different indexes. In March 2007, the subprime loaning market was valued at an outstanding $1.3 trillion, but by June, many borrowers were unable make their mortgage payments. Months later, the economy experienced a ripple effect from the burgeoning housing collapse: property values declined and people lost faith in our debt-based monetary system. The second law of unscrupulous loaning can be summed up as followed:

The Second Law of Unscrupulous Loaning:

Poor judgment + Dodgy mortgage incentives + Increasing mortgage rates = HOUSING MARKET COLLAPSE

The effects of the financial crisis extend far beyond private foreclosure; it also affects banks, lending companies and investors, problems that I shall address later.

-- Dr.Econ

Was the Housing Bubble Bound to Crash?

The above cartoon refers to some people's argument saying that the housing bubble was bound to pop. Notice how above the "housing bubble," there is astronaut of some sort about the pop the bubble with a for-sale sign that reads, "house glut reality." Are we just falling back into reality or is the housing market crashing? A few claim that median income has remain unchanged over the past few years but housing prices have risen by 1/3... which is an unhealthy combination. I am not too concerned about the housing market because I think it is about time that we float back down from our bubble and down into reality.

The cartoon is courtesy of Pat Bagley, of the Salt Lake Tribune.