WHETHER THE SLOWING HOUSING MARKET WILL AFFECT THE OVERALL ECONOMY
The real-estate market is slowing and many economists believe a slowdown of the housing market could hurt the overall economy while others suppose that the strength of American economy in some ways supports housing market. A significant decline in prices and huge buildup of inventories are taking place at today’s housing market.
Among the most stricken areas are California, Arizona, Florida and others situated along the East Coast. As some economists point out markets in these areas could fall 50% from their peaks.
I think that a great deal of economists, homeowners, builders and anyone else who has any connection to the real-estate market are concerned about spheres of economy and people classes which can suffer from the slowdown of the housing market. In my opinion who will suffer the main loses are construction firms and organizations, in the first place, and also people who used aggressive mortgages in purpose to buy a property for further reselling.
The former lose from the huge inventory stalled at the market and lowing prices. Today’s supply of dwellings is not supported by strong demand in many areas, as compared with the recent situation when demand exceeded supply. Thus builders found themselves in unpleasant conditions. Using of incentives partly helps them to remedy the situation, but, as a whole, tough times have ensued for the building organizations.
Many people will also suffer great loses due to the risky mortgages they employed within the last two years. Such aggressive mortgages as interest-only and pay-option adjustable-rate mortgages have been widely used recently. These mortgages required no principal amortization and in some cases payment of only a fraction of the interest due. Thus they motivated people to purchase property for borrowed money in order to make profits. Thanks to mentioned mortgages borrowing became more attractive than home equity. Increasing number of people buying houses with risky mortgages led to the artificially inflated prices. As housing prices are falling people will find themselves in difficult situation and many of them will have to walk away from their homes. Those who used an aggressive mortgage now are struggling to meet the mortgage payments. In accordance with the statement of Kenneth Heebner, who since 1994 has managed the $1.2 billion CGM Realty Fund, we are going to see increasing foreclosures over the next several years.
I suppose it is obvious that those homeowners who don’t have a mortgage because they own their property outright will not experience the influence of slowdown trends at housing market. They accounts for more than 25%.
I doubt also whether such areas like Texas, Iowa City or Minneapolis will suffer much from the slackening of housing market. These markets didn’t see such a large lowing of price gain as California, Florida and others located along the East Coast.
According to the opinion of many economists the greatest losses will be suffered in those areas where prices were artificially raised too high (this bear a relation especially to mentioned above California, Florida, Arizona and other housing markets along the East Coast). But even despite on big size of some mentioned markets, economists suppose that the regional slowdowns will not reverberate throughout the economy. Mr. Heebner considers that “most people won’t have problems and much of the country will be fine”. He argue also that some regional slumps (or “pops” as he called them) “will reduce the growth rate of the economy, but they won’t precipitate a downturn”. In accordance with his opinion only the Federal Reserve can cause a downturn of the economy by means of his aggressive action.
“I think the current pattern of higher interest rates reflects a decision to normalize rates after taking them to abnormally low levels to stave off potential deflation. When the extent of the housing slowdown becomes apparent, I think the Fed will pause, rather than take rates to a level that threatens an economic downturn. The only real threat to the economy is an overly aggressive Fed, and not a downturn in the housing market, which won’t by itself push the economy down,” said Kenneth Heebner.
Thus guided by the statements of some economists and by my own point of view I’d like to conclude that the slowing housing market will hardly hurt the overall economy. The great loses will be suffered mainly by people used aggressive mortgages and also by construction firms located in the areas situated along the East Coast. But the great bulk of population and the economy in general will be fine, especially if the Federal Reserve suspends its aggressive policy and stops to raise mortgage interest rates.