The first thing we have to recognize is that the housing situation is not going to improve for quite some time. The current inventory of houses available for sale is an eleven months supply or it was the last time it was announced. The normal inventory is five months, so we have more than twice the normal supply available. Even with the mortgage rates coming down, the 30-year mortgage rate was quoted as low as 4.875 percent, the number of foreclosures continues to increase.
What about unemployment? It currently stands at 7.2 percent and is forecast to rise to eight or nine percent or higher. As long as that number continues to rise, consumer confidence will continue to decline. The recent retail sales number declined by twice the amount forecasters had been expecting, and the headlines put most of the blame on the unemployment rate.
One of the statistics that is increasing is the savings rate. As unemployment is rising and consumer confidence is declining, consumers will elect to save their disposable income or use it to pay down debts instead of buying more stuff. Not only is it a response to the feeling of a lack of confidence, it is a result of the over spending we experienced during the run up from 2000 to 2007. The perception of savings was no longer limited to the money in our savings account. It was also unrealized gains in the value of homes, as well as the appreciation in stock and investment portfolios located in 401Ks, IRAs or outright holdings. As long as those holdings remained positive, consumers felt confident and continued to spend. Perhaps a person can’t be faulted for that, however, they should be faulted for the excesses. We are all feeling the aftermath.
The United States, along with the entire world, was on a spending binge and now, like any binge, there is a hangover. While it may sound harsh, the reality of the situation is that many of these homes were purchased by folks living well beyond their means. It is a fact that some of the buyers were capable of buying a home, just not a “McMansion.”
A recession is a natural occurrence of an economy that gets over-extended. This current economy was not only over-extended, it was artificially over-extended. For as far back as economies have been monitored, good and bad times are a natural occurrence. The recessions of 1991 and 2001 were relatively short. As I have said before, because this is a consumer led recession, the length and breath of this recession will be longer. Both the 1973-74 and 1981-82 recessions lasted 17 months. This recession’s official start date, as declared by the National Bureau of Economic Statistics (NBER,) is December of 2007. Therefore the forecast that it will end by the second half of 2009 may be based more on historical data than on the true nature of this particular recession.
The answer to the title, “Is Everything Going to Be Okay?” is yes. Will it necessarily end as forecast? I am starting to have my doubts. While it is very early in the New Year and a great deal has been done, I am concerned we have a long way to go. I am sorry that I cannot begin the New Year with more encouraging news, but we must face the facts. In time it is going to be okay!
