Figues - I admit to the time constraints and there begin to make some time. My management of my life would rate as a joke if anyone could take it seriously.
Another example of why papers should have real editors.
The problem is real. We have sustained the floor on our economy via a home refinancing boom. It just misses the major issue in refinancing, which is the drop in interest rates, freeing up household cash flow. With the Fed Funds rate at 1% mortgages have probably reached near bottom as anything of a further cut will make money market accounts and savings account more expensive for financial institutions to manage than the very nominal interest that they pay [imagine the public reaction to being told the bank wants a fee to hold your money]. The rates are slowly creeping up. The end of the road for cash flow savings is in sight. This will do more than dry up consumer spending. It will also prick a hole in the housing price bubble that is holding up consumer confidence. Most people figure how much house they can afford on a cash flow basis. Lower interest rates means for the same monthly nut they can afford more house. With interest rates starting to run in reverse this will mean on fixed income/cash flow they need cheaper houses.Yet the house is the major source of wealth for most Americans. If a neighborhood house sells for more they feel rich. If prices are falling they feel poor.
Scott
From today's WT:
Consumption junction
America's seemingly indefatigable consumer played a crucial role during the latest recession and the jobless recovery that followed. The relatively mild recession would have been much more severe (and probably longer) had the consumer not remained so tireless throughout the downturn. Also, the weak recovery would have been without the continued strength of personal consumption, which accounted for more than 70 percent of gross domestic product (GDP) last quarter.
Probably no factor contributed more to the economy's indispensably robust consumption during the recession and recovery than the increasingly liquefied home-mortgage market. Over the past three years, mortgage refinancings and home sales have repeatedly delivered hundreds and hundreds of billions of dollars to households through equity extractions during the mortgage-refinancing process and the realization of sizable capital gains from home sales. The recent big spike in long-term interest rates may signal that the refinancing binges and soaring home values have come to an end. If so, the predictable effects may reduce consumption. This would occur at the very moment when policy-makers, politicians and workers are hoping for an acceleration of the economy's growth rate in order to begin to reverse the loss of 3.25 million nonfarm private jobs since the eight-month recession began in March 2001.
According to Freddie Mac, the monthly average interest rate for a 30-year fixed-rate mortgage bottomed out at 5.23 percent this past June, nearly 2 percentage points below the June 2001 rate. The monthly average rate for a 30-year mortgage reached its cyclical peak in May 2000 at 8.52 percent. Last week, the rate was 6.24 percent.
As for refinancing, Federal Reserve Chairman Alan Greenspan said in a March 4 speech that nearly 10 million regular home mortgages were refinanced in 2002. He estimated the dollar volume of these regular refinancings to be $1.75 trillion, net of cash-outs. In addition to the cash-outs from refinancing and home-equity loans, households extracted another $350 billion in home equity last year through the capital gains realized on the sale of 6.4 million existing homes. Altogether, Mr. Greenspan estimated that households extracted about $700 billion in previously built-up equity from owner-occupied housing in 2002 alone.
Much of the extracted home-equity funds have financed consumption, which has been increasing much faster than GDP since the beginning of 2001. The question is: If the mortgage-refinancing boom and the rise in home values have simultaneously petered out, how will consumption increase at a sufficient rate in order for the annual growth rate of GDP to accelerate beyond the 4 percent that is necessary to achieve a sustainable increase in employment? Understandably, that now is a concern of policy-makers.
posted by scott 7:17 AM