Tim has been reading a lot in the last 6 months or so about the financial health of our country and our dinner conversations have used a lot of words like bullion, hyper-inflation, sub-prime lenders, the gold standard (thought up by Sir Isaac Newton), and debt. Fewer economists are thinking that the economy will remain the same as it has been. Likely something bad is going to happen, but we don't really know what that entails. More frequently are news articles popping up stating the same, including this one:
New-Home Sales Plunge to Lowest Level in More Than 12 Years, Heighten Recession Fears
WASHINGTON (AP) -- The housing market plunged deeper into despair last month, with sales of new homes plummeting to their lowest level in more than 12 years.
"I think you can classify what we are seeing in the housing market as a crash," said Mark Zandi, chief economist at Moody's Economy.com. "Sales and home prices are in a free fall. The downturn is intensifying."
Would-be home buyers have found it more difficult to secure financing, especially for "jumbo" mortgages -- those exceeding $417,000. The tighter credit situation is deepening the housing slump. Unsold homes have piled up, which will force builders to cut back even more on construction and look for ways to sweeten the pot to lure prospective buyers.
Foreclosures have soared to record highs and probably will keep rising. A drop in home prices left some people stuck with balances on their home mortgages that eclipsed the worth of their home. Other home buyers were clobbered as low introductory rates on their mortgages jumped to much higher rates, which they couldn't afford.
Former Federal Reserve Chairman Alan Greenspan recently warned that the economy is "getting close to stall speed." The big worry is that the housing and credit troubles will force individuals to cut back on spending and businesses to cut back on hiring and capital investment, throwing the economy into a tailspin.
The most important thing you can do to prepare is reduce the amount of debt you owe. If money becomes worth less than it is today than large debt will become insurmountable, and if jobs become scarce than it is better to be as unencumbered as possible. Just like a smart coastal homeowner buys extra batteries and has an evacuation plan ready during hurricane season, the smart citizen of today will batten down the hatches of his finances for the likely on-coming storm.
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I have read many of those stories, too. And I am not saying that we don't have economic problems at the moment. We seem to believe that we can have guns, butter, and tax cuts now, which means that future generations will have to pay later. That's not a conservative policy toward our wealth.
At the same time, the problems with subprime mortgage lenders get a lot of press, but that is not all there is to the housing market. People with good credit and savings can still get home mortgages. Another problem has been the over-valuation of homes--a bubble--in certain markets. Those markets are seeing reductions of value to more realistic prices. But all housing markets in the US are not in "free-fall." In many places in the country, where homes were not overvalued, the markets are doing okay. For example, where we are, houses are still selling, albeit more slowly, because people from overvalued markets are not speculating. I think the media tends to report stuff like this as if it is monolithic. And that tends to frighten people into making it so.
Finally, I think you are right in your last paragraph. We all do best by living within our respective means. And I really feel for those people who bought houses too expensive for their budgets, or have ARM's for the full value. They are hurting right now.
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