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
Thursday, November 29, 2007
Monday, November 5, 2007
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
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
Sunday, November 4, 2007
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
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.
Newsweek: Dream House or Nightmare?
For those who have a harder time grasping the housing market, Newsweek has an excellent article highlighting a specific family who is affected by the slumping housing market. The article focuses on families who have built custom-built houses, expecting to cash in later on their investment. For example, the Elliott family built a $750,000 house, using part of inheritance money. They expected, based on the rising housing market from 2000 to 2005, to gain high returns on their investment. But instead, the house is rapidly losing its value and as the National Association of Realtors predicts, home sales will fall by 10.8 percent from 2006. The owner, Roger Elliott, predicts that the house is now worth 10 percent less than it cost to build. The article goes to show that not only those who financed homes with a subprime adjustable rate mortgage are at risk. In fact, the Elliotts have lots of equity and are not worried about paying mortgages. The housing market is affecting everyone in different aspects. Personally, I think it's unfortunate that those who were counting on using their houses as an investment are let down by the slumping housing market sales.
What Did Bernanke and Co. Do About This Stumbling Market?
Ben Bernanke, the Federal Reserve Chairman, and his fellow Board of Advisors took action. I think that the Federal Reserve should cut interest rates a bit more, even though they have already cut the Federal Funds Rate (what banks pay to borrow money from each other overnight) from 5.25% to 4.75% -- an aggressive 0.50-point decrease designed to "shock" the market back into life. I like what the Fed did: the cut will allow liquidity to be alive and consumer confidence to be high. If the banks are charged a lower interest rate, then they will perhaps loan out more money.
But, there is one problem that I have with this action. By reducing the interest rate, Bernanke has given inflation a chance to pick up. The US has a relatively low inflation rate compared with many other nations (this is good--believe me), but if the interest rates are decreased, then perhaps inflation might, well, inflate.
I must admit, though, the possibility of inflation picking up is remote, as the US economy is quite strong now.
~Dr. ECON
But, there is one problem that I have with this action. By reducing the interest rate, Bernanke has given inflation a chance to pick up. The US has a relatively low inflation rate compared with many other nations (this is good--believe me), but if the interest rates are decreased, then perhaps inflation might, well, inflate.
I must admit, though, the possibility of inflation picking up is remote, as the US economy is quite strong now.
~Dr. ECON
Saturday, November 3, 2007
What Can You Do? Elizabeth Razzi Has "Steps That You Can Take" To Stay on Top
In the recent issue of the Reader's Digest, Elizabeth Razzi wrote an article about the subprime mortgage market entitled, "House Wrecked?" Razzi, after analyzing a few personal cases of people losing their homes to foreclosures, created a list of steps one can take to stay on top of the market. I am posting a few of her steps:
- Get an expert on your side. Razzi says, "You can get advice on avoiding foreclosures from a housing couselor approved by the US Deparment of Housing and Urban Development*."
*In case you wanted to reach that site, click here.
- Make copies of all of your documents.
- Ask the lender to waive prepayment penalties for refinancing.
- Razzi says "Do not work with anyone who asks you to sign a "quitclaim deed^."
^If you are unsure as to what a quitclaim deed is, go to Dr. Wikipedia's website. Or, read on. A quitclaim deed is a legal document which hands over ownership of your home. Obviously, don't sign this. You don't want to lose your home!
- Get an expert on your side. Razzi says, "You can get advice on avoiding foreclosures from a housing couselor approved by the US Deparment of Housing and Urban Development*."
*In case you wanted to reach that site, click here.
- Make copies of all of your documents.
- Ask the lender to waive prepayment penalties for refinancing.
- Razzi says "Do not work with anyone who asks you to sign a "quitclaim deed^."
^If you are unsure as to what a quitclaim deed is, go to Dr. Wikipedia's website. Or, read on. A quitclaim deed is a legal document which hands over ownership of your home. Obviously, don't sign this. You don't want to lose your home!
Housing Market WILL NOT cause a recession
In response to the previous post, the other side of the debate...
According to economic analysts at CNN, the housing market recession is not global, nor national for that matter. Decline in housing capital can only bee seen in certain parts of the United States; parts in the Southeast are hardly affected and have rapidly growing markets. Both analysts and prospective homebuyers believe that the housing recession has already reached its lowest point and, once sellers relax prices enough, buyers with good credit will return to the market, discoursing unscrupulous lending practices and variable-interest mortgages. Similarly, the Federal Reserve should not interfere with a recovering trend, which is part of natural cycles of growth and recession in the economy. There is not enough capital in the housing market for people to make loans at this stage, but most Americans say they are confident they could sell their home within the next six months for a fitting price.
Stricter regulation should also be placed on subprime mortgages to prevent rapid economic recessions in the future. Measures must be taken prevent borrowers from falsifying information about their financial condition to obtain a subprime mortgage (known as a "Liar Loan") and to curb dishonest subprime lending practices and "predatory" mortgages. However, policy regarding the market regulation must not involve the Federal Reserve, which is blamed for much of the recession after they created a reckless demand by making the cost of borrowing money artificially cheap. Although the housing market is currently in a slump, the overall economy is still healthy and shows little loss of momentum from the recession. Availability of jobs has risen to 28.6 percent from 28 percent and interest rates have not increased, indicating that the status quo is currently maintained.
According to economic analysts at CNN, the housing market recession is not global, nor national for that matter. Decline in housing capital can only bee seen in certain parts of the United States; parts in the Southeast are hardly affected and have rapidly growing markets. Both analysts and prospective homebuyers believe that the housing recession has already reached its lowest point and, once sellers relax prices enough, buyers with good credit will return to the market, discoursing unscrupulous lending practices and variable-interest mortgages. Similarly, the Federal Reserve should not interfere with a recovering trend, which is part of natural cycles of growth and recession in the economy. There is not enough capital in the housing market for people to make loans at this stage, but most Americans say they are confident they could sell their home within the next six months for a fitting price.
Stricter regulation should also be placed on subprime mortgages to prevent rapid economic recessions in the future. Measures must be taken prevent borrowers from falsifying information about their financial condition to obtain a subprime mortgage (known as a "Liar Loan") and to curb dishonest subprime lending practices and "predatory" mortgages. However, policy regarding the market regulation must not involve the Federal Reserve, which is blamed for much of the recession after they created a reckless demand by making the cost of borrowing money artificially cheap. Although the housing market is currently in a slump, the overall economy is still healthy and shows little loss of momentum from the recession. Availability of jobs has risen to 28.6 percent from 28 percent and interest rates have not increased, indicating that the status quo is currently maintained.
Housing Market WILL cause a recession
The housing market crisis began with a high rise in housing price (about 80%) and subprime lending which became about 35% of the credit market. Subprime lending is the practice of lending to people who had poor credit history. Furthermore, the interest rates were at around 1%. However, when lending slowed down and interest rates went up, many couldn’t pay mortgages. As a result, the demand for housing was reduced and home prices fell. There was a 30% decline in housing activity that could reduce the GDP growth by 1.5 percentage points, according to the American Enterprise Institute Newsletter. Now, lenders are tightening standards and are making it increasingly difficult for people to obtain loans. In fact, Merrill Lynch rates the chances of a recession at 65%. According to the Washington Post, the Fed has already cut federal funds rate (what banks pay to borrow money from each other overnight) from 5.25% to 4.75% to keep liquidity alive and keep consumer confidence high.
Although the housing market is part of the business cycle, the housing market has a tendency to fall for years. One in five subprime loans issued between 2005 and 2006 are projected to fail and at least four subprime loan lenders filed for bankruptcy. The impact will be likely to spread elsewhere as a result of the adjustable rate mortgages and zero down payments. Countrywide, the biggest mortgage financier, is to cut 12,000 jobs and Lehman Brothers are to cut 2,000 jobs. Also, there are 22,000 less jobs in construction and 46,000 less jobs in manufacturing as a result of the housing market crisis. There should be more government intervention, especially from Fannie Mae and Freddie Mac, the nation’s biggest mortgage companies. There should also be stricter regulation of the subprime mortgage market, which Senate Banking Committee Chairman Chris Dodd calls “unconscionable” and “deceptive.”
Although the housing market is part of the business cycle, the housing market has a tendency to fall for years. One in five subprime loans issued between 2005 and 2006 are projected to fail and at least four subprime loan lenders filed for bankruptcy. The impact will be likely to spread elsewhere as a result of the adjustable rate mortgages and zero down payments. Countrywide, the biggest mortgage financier, is to cut 12,000 jobs and Lehman Brothers are to cut 2,000 jobs. Also, there are 22,000 less jobs in construction and 46,000 less jobs in manufacturing as a result of the housing market crisis. There should be more government intervention, especially from Fannie Mae and Freddie Mac, the nation’s biggest mortgage companies. There should also be stricter regulation of the subprime mortgage market, which Senate Banking Committee Chairman Chris Dodd calls “unconscionable” and “deceptive.”
What does Time say?
Recently, in my research about the housing market, I came across an article from Time that looks not just at what the housing market is doing but also why it influences the economy as a whole.
The reason economists are speculating a recession is due to the decline in house sales not only in smaller cities like Cleveland but also more populated ones such as Los Angeles and New York. As the article states, the decline in housing demand in these areas has led to a substantial decrease in jobs and spread rumors of the impending recession.
- Dr.ECON
The reason economists are speculating a recession is due to the decline in house sales not only in smaller cities like Cleveland but also more populated ones such as Los Angeles and New York. As the article states, the decline in housing demand in these areas has led to a substantial decrease in jobs and spread rumors of the impending recession.
- Dr.ECON
Thursday, November 1, 2007
R.J. Matson's Humorous Look at Housing
Courtesy of http://cagle.msnbc.com/news/HousingMarket07/main.asp
Top Ten Things You Should Know About Economic Policy
For those economic amateurs, I have compiled a list of economic terms and concepts and defined each term. I may be using some of these terms in my future posts, so having this as a reference may be helpful!
1. Gross Domestic Product (GDP): Total of all the goods and services produced in the country during a given year.
2. Federal Reserve System (the “Fed”): There are seven members on the Federal Reserve Board who are appointed by the President and approved by the Senate. The Federal Reserve regulates the supply of money, the price of money and sets the monetary policy. It can set its monetary policy in the following ways:
a. Buying gov’t securities -> more money in circulation -> interest rates drop -> more money is borrowed and spent.
b. Selling gov’t securities -> less money in circulation -> interest rates rise -> less money borrowed and spent
c. Regulating the amount of money member banks keep as reserves to back up customer deposits. If bank must keep a larger amount of the deposits than lending it out, then loans become harder to get and interest rates rise.
d. Changing the interest rate (know as discount rate) for banks that want to borrow money from the Federal Reserve System for short-term needs.
There are also 12 Regional Federal Reserve Banks that buy and sell government securities, loan money to member banks, and keep a percentage of holdings for member banks . The interest rates the member banks must pay to regional banks influence their own interest rate for business and personal loans.
3. Monetarism: The belief that inflation occurs when there is too much money and too little goods. The government causes inflation by printing out too much money and a recession by cutting back on the money in circulation. As a result, the government must have an increase in the money supply equal to the growth in the economy’s productivity.
4. Keynesianism: The belief that the economy’s health is dependent upon how much people spend or save. The task of the government is to create the right level of demand. If the demand is great (when people spend too much) and inflation occurs, the government needs to cut spending. If the demand is too little (when people save too much) and a recession occurs, the government needs to spend money.
5. Economic Planning: The belief that government should plan the economy through wage and price controls and direction of the investment. Especially during inflation, the government should regulate wage and price controls, at least in larger industries.
6. Supply-side Theory: The belief that there should be less government interference and taxes should be cut. Cutting taxes will -> increased investments -> more jobs -> greater productivity of economy -> more people that are richer (because of the “trickle-down” of the money supply
7. Reaganomics: The belief that monetarism, supply-side tax cuts and domestic budget cutting would reduce the size of the federal government, stimulate economic growth and increase military strength. The result was that Reagan created a huge budget deficit while reducing unemployment.
8. Congress: Congress approves all taxes, almost all expenditures, wage or price controls and the policy of Federal Reserve Board. The decisions Congress makes regarding economic issues, such as how high taxes should be and how much money the government should spend, constitutes the nation’s fiscal policy.
9. Troika: Three people who advise the president on economic policy making. These people are:
a. Chairman of the Council of Economic Advisers (CEA) : The CEA is a group of experts who forecast economic trends, analyze economic issues and prepare economic reports for Congress.
b. Director of the Office of Management and Budget (OMB) : OMB prepares estimates of how much federal agencies will spend, negotiates with other departments over the budget sizes and makes sure legislative proposals are in accord with president’s program.
c. Secretary of the Treasury provides estimates of revenue from taxes and the result of changing tax laws. The secretary also represents the US when dealing with other nations in economic issues.
10. Income Tax: A way for the government to get revenue from the people. It is a progressive tax, meaning that the more rich a person, the more he/she has to pay as taxes. The income tax allows majoritarian politics to become class politics. There are many loopholes; usually, the rich capitalize on these loopholes. W/o loopholes, economy would probably suffer.
Whew. I need a break. Anybody up for some monopoly?
--Dr. ECON
1. Gross Domestic Product (GDP): Total of all the goods and services produced in the country during a given year.
2. Federal Reserve System (the “Fed”): There are seven members on the Federal Reserve Board who are appointed by the President and approved by the Senate. The Federal Reserve regulates the supply of money, the price of money and sets the monetary policy. It can set its monetary policy in the following ways:
a. Buying gov’t securities -> more money in circulation -> interest rates drop -> more money is borrowed and spent.
b. Selling gov’t securities -> less money in circulation -> interest rates rise -> less money borrowed and spent
c. Regulating the amount of money member banks keep as reserves to back up customer deposits. If bank must keep a larger amount of the deposits than lending it out, then loans become harder to get and interest rates rise.
d. Changing the interest rate (know as discount rate) for banks that want to borrow money from the Federal Reserve System for short-term needs.
There are also 12 Regional Federal Reserve Banks that buy and sell government securities, loan money to member banks, and keep a percentage of holdings for member banks . The interest rates the member banks must pay to regional banks influence their own interest rate for business and personal loans.
3. Monetarism: The belief that inflation occurs when there is too much money and too little goods. The government causes inflation by printing out too much money and a recession by cutting back on the money in circulation. As a result, the government must have an increase in the money supply equal to the growth in the economy’s productivity.
4. Keynesianism: The belief that the economy’s health is dependent upon how much people spend or save. The task of the government is to create the right level of demand. If the demand is great (when people spend too much) and inflation occurs, the government needs to cut spending. If the demand is too little (when people save too much) and a recession occurs, the government needs to spend money.
5. Economic Planning: The belief that government should plan the economy through wage and price controls and direction of the investment. Especially during inflation, the government should regulate wage and price controls, at least in larger industries.
6. Supply-side Theory: The belief that there should be less government interference and taxes should be cut. Cutting taxes will -> increased investments -> more jobs -> greater productivity of economy -> more people that are richer (because of the “trickle-down” of the money supply
7. Reaganomics: The belief that monetarism, supply-side tax cuts and domestic budget cutting would reduce the size of the federal government, stimulate economic growth and increase military strength. The result was that Reagan created a huge budget deficit while reducing unemployment.
8. Congress: Congress approves all taxes, almost all expenditures, wage or price controls and the policy of Federal Reserve Board. The decisions Congress makes regarding economic issues, such as how high taxes should be and how much money the government should spend, constitutes the nation’s fiscal policy.
9. Troika: Three people who advise the president on economic policy making. These people are:
a. Chairman of the Council of Economic Advisers (CEA) : The CEA is a group of experts who forecast economic trends, analyze economic issues and prepare economic reports for Congress.
b. Director of the Office of Management and Budget (OMB) : OMB prepares estimates of how much federal agencies will spend, negotiates with other departments over the budget sizes and makes sure legislative proposals are in accord with president’s program.
c. Secretary of the Treasury provides estimates of revenue from taxes and the result of changing tax laws. The secretary also represents the US when dealing with other nations in economic issues.
10. Income Tax: A way for the government to get revenue from the people. It is a progressive tax, meaning that the more rich a person, the more he/she has to pay as taxes. The income tax allows majoritarian politics to become class politics. There are many loopholes; usually, the rich capitalize on these loopholes. W/o loopholes, economy would probably suffer.
Whew. I need a break. Anybody up for some monopoly?
--Dr. ECON
Welcome - An Introduction
Hello, I am Dr. Economy, but you can call me Dr.ECON because its reminiscent of Dr. Phil. I am knowledgeable about the United States Housing Market. Ever since I received a PH.D in French Literature, I have decided to specialize in the economy. D'accord? Bien. Anyway, please read my other posts to obtain a general sense of the economy, specifically the housing market at its current state. For beginners, real estate economics is the study of trends that govern the economy.
Signing out, Dr.ECON
Note: Dr. ECON is--if you look at my profile--actually FIVE HIGH SCHOOLERS who have an interest in the US Housing market. The name and ph.d are simply for humor.
Signing out, Dr.ECON
Note: Dr. ECON is--if you look at my profile--actually FIVE HIGH SCHOOLERS who have an interest in the US Housing market. The name and ph.d are simply for humor.
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