Here’s an unpleasant thought: as the nation gradually pulls away from the worst recession in more than a generation, consumer confidence begins to wane and job creation evaporates. That scenario is entirely possible given the current state of the housing market which remains a huge drain on the economy.
Housing Starts
According to published reports including yesterday’s headline article in The Wall Street Journal, new home housing starts plunged by 10.6% in October. Bad weather across most of the nation has been blamed as has worries that the $8000 federal tax credit for new home buyers would not be extended. Subsequently, the weather has improved and the tax credit has been extended and the program expanded to include other buyers.
The US economy probably pulled out of its most recent recession sometime in the third quarter of this year. As we close in to the end of the fourth quarter and end of 2009, there are nagging fears among many that unemployment has yet to hit its peak rate, most recently touching 10.2% in October. Moreover, though consumer spending is up and the Gross Domestic Product (GDP) is on the positive side, many people are sensing that the economy has yet to find solid footing.
Shadow Inventory
The overall housing market has an immense, somewhat hidden drag working against it. Namely, concerns persist that foreclosures will once again become a huge issue in the coming months and years as the number of homes being foreclosed on rise.
This past September, analysts with Amherst Securities Group LP said that they expect that once favorable seasonal housing market disappears until next spring, a “shadow inventory” of seven million homes to be foreclosed will emerge. Right now, 1.9 million homeowners are at least 120 days or more overdue on their mortgage payments, a point where lenders usually have begun foreclosure proceedings.
Side Effects
As the most recent recession proved, too many foreclosures mean that overall housing prices are suppressed. When people aren’t buying homes, then foreclosed property is abandoned or sold for rock bottom prices. Property tax revenues drop as new owners petition and win rate reductions; with less money in coffers towns need to slash services and lay off workers. Moreover, with fewer new home buyers in the market, home improvement stores and related businesses have fewer customers coming in their stores, resulting in more of their employees losing jobs.
A vicious circle, right? Yes, and not one that can be easily broken. And, with Congress considering adding about one trillion dollars more to the national debt via a costly health car reform package, additional debt will do nothing to help strengthen the economy.
No wonder why President Obama fears a double digit recession.
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