The Long Road Home

Issue Date: November 14, 2007, Posted On: 11/14/2007

By Marc Henderson

The Long Road Home

Unless you are living under a rock, you know that the economy is experiencing some form of a correction. Notice the use of the word correction because we dare not say the "R" word – recession. Nevertheless, ask the average consumer or business owner and they will tell you that it is what it is no matter what you call it. Yet specifically, the economic indicators are sending messages that are quite mixed. People who would like to ease concerns of an economic slowdown point to the steady or even declining unemployment rate. Similarly, the rate of inflation is noted in support that the economy is still healthy and strong. On the other hand, keep in mind that the price of both energy and food is excluded in this economic indicator, and most people would contend that this is precisely the area where they are getting hit the hardest. While both the cost of a gallon of gas and the cost of a gallon of milk continue to rise, people look at their spending and begin to trim, even if slowly and only slightly, their discretionary expenses. For example, Starbucks recently came forward and stated that its year-over-year sales are down a full percent. While if this were an isolated event, it would certainly not be making any headlines, but that is just the thing - it is not isolated. With Starbucks, one could wonder if perhaps they have simply over-saturated the market, yet the more likely scenario is that consumers have begun to trim the latte fund (no pun intended).

Even if you do not care to look at the economy at a micro level, the macro view is even more frightening. A significant portion of the American Dream is wrapped up in home ownership, and right now dreams are becoming nightmares. Foreclosure rates are higher than they have been at any point in the last 50 years. While average Americans are losing their homes, large financial companies are also losing their footing in the stock market. The financial sector as a whole is taking a beating on Wall Street, as numerous lenders have come forward to reveal that their involvement in the sub-prime mortgage market runs far deeper than investors were once aware. An unfortunate byproduct of this fall is that banks have become very timid in granting loans for the fear that they will be unable to sell them in the secondary market. Of course the housing climate is not only affecting real estate agents and homebuyers, but is also affecting anyone trying to refinance or obtain a second mortgage. Just years ago, people were taking additional loans to make repairs and improvements in an attempt to increase the value of their homes, whereas now, people are gun shy about putting even the smallest amount of money into this sinking asset. Surprisingly enough, there are places in the United States where the value of people’s homes is actually decreasing, which is astounding considering property was previously seen as an almost foolproof investment. In what seems like desperation, some homeowners have turned to their credit cards to finance projects around the house. This is obviously a dangerous road to travel down, as interest rates on credit cards are far higher than the typical home loan.

The extent of the problem cannot be understood without evaluating how these various pieces are affecting other aspects of our society. For example, a large number of people earn a living by either selling construction supplies or by installing them. New construction is down significantly, and contractors are having a hard time finding work. This is especially evident in communities where laborers make up a significant portion of the population. In some places the situation has become so dire that workers are having to travel far and wide just to find jobs. And what must be understood is that nothing exists in a vacuum. These workers that are not able to find work, were also at one point consumers. So if they are not making any money to spend, and they are not spending any money, the trend will continue to spread to other parts of the economic web. Ask any realtor, contractor, or manufacturer of construction goods and they will tell you that the situation is grim.

The Federal Reserve is currently under fire for the credit crunch. Two previous rate cuts have glimmered a little hope that we will rise out of this mess sooner rather than later. But, on the other hand, until more financial institutions come clean on their balance sheets, the true extent of the crunch will remain unknown. If the financial underlyings of these large banks are worse than expected, the Fed will be much less able to correct the situation by merely administering rate cuts.