The score so far? Housing is still ahead, but is rapidly losing its lead.
prudentbear.com
Gas is up, the cost of heating is up. Even water costs more in many areas as municipalities in drought regions have raised prices in order to discourage consumption. Insurance never stops going up. We’re told how wonderful it is that housing values continue to rise. But the officials don’t discuss housing’s ugly sister: property taxes.
Property taxes are based on home values. The more the local government thinks your house is worth, the more the value rises, the more taxes you have to pay. Meanwhile your wages are the same and nobody is handing you a check because the perceived value of your home is higher. A loan perhaps, but the last time I checked, loans are considered debt and do nothing to boost your bottom line. Anyway, most folks who loan money insist that you pay them back more than you borrowed.
With the “resilient consumer” having gone extinct sometime early this year, housing is the last and only leg this economy has to stand on. Single family housing foreclosures are at a 30-year high. Even while mortgage rates are at a 40-year low! Housing is more affordable than it has been in 40 years, but consumers are having the toughest time paying for it in 30 years! How can this be? Because household debt is at a record level. The average household owes more money than it pulls in during an entire year. Doesn’t matter how “affordable” housing is, if you have no money, you can’t pay for it.
Americans are in debt up to their ears, half of them are effectively bankrupt and most are likely living paycheck to paycheck in a time when unemployment is rising. And the folks at the Fed want us all to believe that lower interest and mortgage rates and increased borrowing will solve the problem! I’m not a thermodynamics professor nor an expert on volatile substances, but I think there’s a reason why firefighters don’t pour gasoline on burning houses. Somewhere in there is a lesson that the Fed would be very wise to heed.
The Fed’s logic goes something like this: if housing continues to rise and interest rates remain low, consumers can keep borrowing against the imaginary value of their homes and spend that imaginary money (which is actually debt) and thereby prop up the economy. Of course the implicit assumptions are that housing can rise indefinitely and that consumers can afford to spend on toys. The latter, as we know, is rather suspect given the rapidly increasing prices of many necessities. The former is rather doubtful as well.
Housing starts have fallen. Home foreclosures were up 38% for the first quarter in the Denver area. The folks at Bridgewater recently stated that homebuilders’ expectations for future 6-month sales dropped sharply in March after having dropped in February as well. From where I’m sitting, it looks as though the housing bubble might finally be popping.
Of course, the Fed will tell you there’s no bubble. Just like they used to say there was no stock market bubble. But the IMF warns that housing might be on the verge of a slump following two years of record sales of homes and huge advances in prices. This while the economy is weak and the stock market is down 50%. That’s not a bubble? Perhaps not. But logic dictates that home values can’t keep rising forever when half of Americans are effectively bankrupt.
Consumers Bankrupt, Costs of Living and Debt Rising
That GM 0% financing deal is going to come in quite handy for the nearly half of Americans who are apparently bankrupt these days. According to the Cambridge Consumer Credit Index, 40% of credit card holders are making only minimum payments on their credit card balances. Six percent have stopped paying entirely.
There are only two reasons why a consumer might pay the minimum balance on a credit card. The first is that the interest rate is so bloody low that it only makes sense to pay off as little as possible. But we don’t live on Fantasy Island. So we conclude that the real reason is the second: it’s all they can afford to pay.
If all you can afford to pay is your minimum balance, that means that you have less money than stuff, and a lot of that stuff belongs to someone else. In other words, you’re in debt. Your net worth is negative. Said another way, you’re bankrupt. Not officially bankrupt until you legally declare it so, but if you owe more money than you have, if your net worth is negative then you are, for all practical purposes bankrupt. The difference between practical bankruptcy and legal bankruptcy is that in the former, you’re still keeping up with your payments. But you’re still effectively bankrupt.
With almost half of credit-card holding Americans (i.e. most Americans) effectively bankrupt, do we have the basis for a traditional economic recovery, that is “pent-up demand”? I don’t think so. Recoveries happen after a period of slowdown during which consumers tighten up, and limit their purchasing in order to pay down some debt and improve their bottom lines. That creates “pent-up demand” which uncoils like a spring as increasingly financially sound consumers hit the stores, eager to get back to shopping. But this time around, the “resilient consumer” has not curtailed his demand, has not improved his bottom line and has instead gone deeper into debt.
If you want to know why the old rules aren’t working, why things aren’t improving after twelve rate cuts, why the recovery isn’t happening, consider that you won’t get a traditional recovery if you don’t have a traditional slowdown. These days consumers are acting in non-traditional ways by going deeper into debt, rather than paring down debt. During the 1991 recession consumers lopped $11 billion off their non-mortgage debt. Last year they tacked on $110 billion. Sound like a recipe for economic growth? Or a recipe for financial disaster?
The consumer is the lifeblood of the economy. The consumer is responsible for a big chunk of GDP. Alan Greenspan is relying on the “resilient consumer” to save the economy and his reputation. I don’t know that the odds are so good. While the Fed tells us that inflation is tame, the consumer knows otherwise. Costs for heat, gasoline, utilities, water and insurance are rising. Big time.
But the official statistics for inflation are nonetheless low. Why? Because those stats always carry the inane disclaimer “excluding the volatile food and energy sectors” or the ridiculous “seasonally adjusted” statistical massage job. Seasonally adjusted, it never snows up here at 9000 feet elevation in the Rocky Mountains. But excluding the volatile seasonally adjusted sector, I got five feet of snow a few weeks ago!
We’re talking about basic, necessary costs of living, non-discretionary expenditures that we have to pay. When gas rises, you don’t start taking days off of work to save fuel. When health insurance rises, you pay it, assuming you can still afford it. Water and taxes: pretty much mostly non-discretionary expenditures for most folks, I gotta’ believe.
And so the formerly “resilient consumer” is rapidly evolving into the “time-to-deal-with-reality consumer”. Consumption has been down for two months in a row. And it wasn’t because folks were busy watching the war on TV, contrary to the lame excuses and bogus claims of the intellectually-lazy financial media.
That’s the score so far on the consumer front and from where I’m sitting, the consumer isn’t winning. |
