Housing prices down; Stock Market down; Economy slowing; & the benefits

[dex]

I was thinking about this recently - that there has not been a substancial recession in the USA for quite some time - I'm talking at the level that occurred in the 1970s and early 1980s.

This might sound hartless to some people but it is not intended to be hartless - just an objective (as far as is possible) view.

Recessions shake out the execeses in the economy just as nature hates excess so does economics. Where have been the excesses - mostly in:
Money growth
Government spending
Lending
General Publics expectations for the economic future - personal and the economy's in general.

There is a theory that depressions happen approximately every 60 years due to the generational affect
1st generation grows up poor and saves money - this becomes the cheap seed money for the general economy's growth
2nd generation builds upon the 1st because of what was taught to them by the 1st BUT they are more liberal in spending with their children
3rd generation does not know about the bad time - spends and goes into debt
The Chinese have a saying it takes three generations to loose a fortune - similar to the above.

So on the negative side - if there is a recession there will be a lot of pain for people who are in debt and those who loose their jobs. One of the greatest pains will be what we here in the media and politicians when the unemployment rate increases from 4.5% to ? No one will say that the past few years were uncommonly low rates for unemployment because 4.5% is the what the new standard will be.

Depending upon how deep the recession is will determine how radical the proposals will be.
Small - similar to the one from Bush 1 to Clinton - no actions
Mild - focus on illegal immigrants and expelling them
Harsh - focus on all the work exported to China and India
Extream - protectionism

The benefits:
For the general economy - shake out of excess

For those RE & have cash:
Opportunity to buy investments at a discount
Opportunity to buy many hard assets at a discount - real estate; stocks etc.

I guess I am posting this for the younger members on the board who have not experienced a recession and if you think about it unless you were born in 1960s and remember the recessions of the 1970s and early 1980s many do not really know what they are.

If a recession dose hit then all the advise about not having debt and having a rainy day fund begins to mean something.

I hope other knowlegeable posters contribute in a similar vain because the next few days due to the concerns about the stock market and sub prime loans the media will be talking doom and gloom.

I just bought a house in a new subdivision with land still to be build upon. The builder could build and sell homes for less than I paid so I do have some risk in real estate and other investments.

The greatest fear I have is that there is another terrorist attack in the USA. The reason is my rule of 3. In most things in life you can screw up one or two things and it will not get you fired or kill you. It is usually the third thing that gets you.

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I should have added some facts to this topic:
http://en.wikipedia.org/wiki/1970s

"The 1970s was perhaps the worst decade of Western and American economic performance since the Great Depression. Although there was no severe economic depression as witnessed in the 1930s, economic growth rates were considerably lower than previous decades. As a result, the 1970s adversely distinguished itself from the prosperous postwar period between 1945 and 1968. Then, the world economy was buoyed by the Marshall Plan and the robust American economy. However, the high standing enjoyed by the American economy gradually became discomposed by years of loose domestic spending (particularly the Great Society campaign) and funding for the Vietnam war. The oil shocks of 1973 and 1979 added to the existing ailments and conjured high inflation throughout much of the world for the rest of the decade. Soaring oil prices compelled most American businesses to raise their prices as well, with inflationary results. The average annual inflation rate from 1900 to 1970 was approximately 2.5 percent. From 1970, however, the average rate hit about 6 percent, topping out at 13.3 percent by 1979. This period is also known for "stagflation", a phenomenon in which inflation and unemployment steadily increased, therefore leading to double-digit interest rates that rose to unprecedented levels (above 12% per year). The prime rate hit 21.5 in December 1980, the highest in history. By the time of 1980, when President Jimmy Carter was running for re-election against Ronald Reagan, the misery index (the sum of the unemployment rate and the inflation rate) had reached an all-time high of 21.98 percent.

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Unemployment rate see the included chart for the 70s and 80s
http://en.wikipedia.org/wiki/Unemployment_rate

[Retire Soon]

I think there is a lot of truth in what Dex has to say. I'm very surprised that the housing market isn't worse now than what it actually is. Many people in the third generation that dex refers to do not know what it is like to have to save money for a down payment to buy a house. But, many sure know what it's like to be in foreclosure.

Iraq is the worst mistake the U.S. government ever made. Aside from all the casualties in this war, it will eventually raise our taxes to pay his it. We will all pay for it with a lower standard of living.

Dex also raised a very valid concern about the sub prime mortgage market. When it's all done and over with, we'll have a scandal that will make the Savings and Loan fiasco of the early 1980's look small in comparison. This problem will probably lead to a real estate slump similar to the one that we had in the 90's and perhaps even worse.

We've burned up a substantial portion of the world's petroleum reserves with our SUV's and RV's and now with China's rapidly expanding economy and intense building expansion, three dollars for a gallon of gas comes as no surprise. When will it reach $4 ? Trouble is, the cost of commuting is going to suck money out of our economy that would ordinarily be spent on other items.

With our country unwilling to deal with illegal aliens crossing our borders and a health care system that is spiraling downward with uncontrolled prices, we'll all suffer in our next recession. Dex is right, and that's all I see in my crystal ball.

[audreyh1]

We had a recession in 2002. Even though the recession was mild, we still went through an unprecedented 3 down years in the stock market.

It does seem as if business cycles have been stretched out over more years, and recessions tend to be more shallow. This may be for many reasons - a better Fed, much more streamlined manufacturing (less inventory, etc), a more efficient economy in general, a more global economy, etc., etc.,

Personally, I don't believe we are seeing a slowing economy, I believe most of it has already happened. I follow ECRI (www.businesscycle.com) and they see the economy coming out of the slowdown in the second half of this year. That's pretty soon.

It's hard to say how the subprime blowup might affect markets for a while, but IMO the impact on the economy as a whole will be small and well contained.

It also seems like this excess liquidity is finally coming out of the system. This will take a while. It also might roil markets, but overall it just seems like it should limit asset appreciation. It's hard to see how it would negatively impact corporate profitability (well, OK a little, money won't be as cheap). But companies are at record profit levels, if they pull back a bit I don't see how that is so dire.

Recessions happen, that's one reason to own some "recession proof" investments if you are living off your investments.

Audrey

[wabmester]

Quote:

Originally Posted by audreyh1 It's hard to see how it would negatively impact corporate profitability

Consumer spending is something like 70% of GDP. Consumers have been spending more than they make (thanks to mortgage equity extraction). It's not hard to see how this will impact corporate profits.

A large chunk of those profits came from oil and financial companies. We know the financial sector is hosed. Oil prices generally fall as the economy cools.

The credit squeeze is here. The consumer spending squeeze is coming. Jobs are next. I can't predict the magnitude or duration, but the direction seems pretty clear.

[Running_Man]

The subprime market collapse is a BIG deal in my opinion. 17.86% of all subprime loans are in default. In the New York Times today it was disclosed that forclosures have hit their highest level ever since the forclosure rate has been measured. General Motors is injecting 1 billion dollars into GMAC for bad subprime loans. General Motors is really not in a good position to bail out their credit arm.

The decline in this segment is due IMO to the decline in housing values of 8 percent over the last year. When you borrow 100% there are no gains to bail you out and no reason to not default. As these mortgages fail the homes will be put for sale and credit terms will be tightened. This will insure fewer buyers, more houses so lower prices and sales for '07. The people who are evicted in this process are among the poorest and least credit worthy. They will all feel they were taken advantage of by the evil mortgage industry. Subsequently they make good political stories in an election cycle so expect Congressional hearings and a whole new Sarbanes-Oxley type regulations for the mortgage industry.

This unfolding process will first hurt:

Homebuilders (already obviously affected)
Financial Institutions lending to home buyers (bearing the brunt now)
Home supply centers
Paint manufacturers (fewer houses painted for sale) realization:soon
Chemical companies - supply raw materials for the paint industry
Auto Manufacturers/Suppliers - car sales will slow drastically as basic industry slows


I would hate to have investments in the above group but from there later it will spread to non-cyclicals.

At this point the process has barely begun as we are only a little over 5-6% from the all time high and maybe down 1 percent on the year. Only when we get to 25-30% down on the year will the true slowdown of the economy be realized adn the true scapegoating begin. At that point a reevaluation will be needed to see how severe it appears it will be.....

[JustCurious]

Quote:

Originally Posted by audreyh1 We had a recession in 2002. Even though the recession was mild, we still went through an unprecedented 3 down years in the stock market. Audrey

Audrey, you need to study history a bit more if you think that 3 down years is "unprecedented." There have been four times since 1897 that the DJIA has declined at least three years in a row.

http://www.safehaven.com/article-335.htm

Also, after the stock market crash of 1929, the market did not regain the same level until 1954, some 25 years later!

http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929

In more recent history, since 1956 there have been nine stock market declines of between -19% and -48%, and the average time to recover from those declines was 2.5 years (31 months). The longest and deepest of those declines was between 1973 and 1980, when the market took 7.5 years (90 months) to recover.

http://www.fool.com/retirement/retir...port000717.htm

[laurence]

We borrowed our way out of the last recession in 02, all that GDP growth came from consumers spending their home equity! If I was to guess - and it is just a guess - I think we are in for some mediocre years, but not terrible. What I think is funny is the Repubs will lose power just in time for the bills to come due, then Dems will have to raise taxes to pay for the mounting debt, and promptly get painted as "tax and spend" democrats! But it has to happen. Right now interest on the debt is 11% of the budget and rising. I can't imagine paying 11% of my income just to service the debt on my credit cards! Add Social Security, Medicare, Medicaid, and Defense Spending and you are left with something like 14% of the budget for lawmakers to grandstand on ( Welfare Queens, Pork Barrell this, Earmark that). At some point the govt. simply won't be able to bail out an industry, because every cent will either be used in healthcare, wealth redistribution, war, and debt payments. Perhaps then we'll find out if pure capitalism can solve it's own crisis.

[macdaddy]

There is just too much money floating around the world. Even with housing values, rents haven risen (inflation) so that if prices roll back to 2002 levels, everything is cash flow positive, and investors will step in and buy up everything... it seems like there are trillions of dollars all hunting for undervalued asset classes that will yield more than 7%... and the baby boomers are entering their most productive years and say they will continue to work forever anyway... I hear a lot of talk but don't see the recession coming. What's going to be the spark? Not housing... even with the declines, there is still too much money that will flow into housing as prices decline/yields improve, besides which rates can be lowered and that would be another shot in the arm for the industry. I don't see any storm clouds until the boomers start to hit 70, take SS and consume expensive medicare services en masse... still aways away...

[Mysto]

I think there is a recession coming and the driver won't be housing, etc (although it may be blamed on that) It will be the consumer. Everything has been hinging on consumer spending and as has been pointed out - they are spending more than they have. At some point this has to stop. Consumers will, in mass, realize they have to pay for all this "stuff". When they do the, party will end quickly.

What will make it happen? If I knew I would be the economic god. I think it will happen. And I think it will happen sooner rather than later.

[audreyh1]

For most of 2000, earnings did not go up very much at all for individuals. Easy credit/home equity has helped the consumer spend. But now personal incomes have started to rise. This will help mitigate the tighter credit situation.

The auto industry is already in the tank. Has been for a while.

Even though a high percentage of sub-prime loans are in default, the subprime market as a whole is still quite small compared to the total mortgage market.

We all knew the subprime thing would end badly. It's just a matter of time.

I guess with unemployment so very low and personal incomes rising faster than they have for a while, I have a hard time seeing a recession soon.

I tend to agree with the "mediocre years ahead" thesis.

Audrey

[tryan]

Quote:

about the sub prime mortgage market. When it's all done and over with, we'll have a scandal that will make the Savings and Loan fiasco of the early 1980's look small in comparison.

Wow ... another Resolution Trust Corp (RTC) bail-out ... damn, I hope so! Made most of my wad buying RTC/HUD properties for a dime on the dollar (owed).

Where there's chaos, there's OPPORTUNITY!

[CCdaCE]

Compared to the long term outlook of the Congressional Budget Office, all of this housing/jobs/inflation seems like a dull hiss in the background compared to the roar of taxes vs. GDP/Medicare/SS ratios...

CBO - Long Term Outlook

Someone needs to draw the line of connection between the two (federal spending vs. Economy) for me, since, as Dex says, I haven't been through a previous recession.

-CC

[JustCurious]

Quote:

Originally Posted by Laurence Right now interest on the debt is 11% of the budget and rising. I can't imagine paying 11% of my income just to service the debt on my credit cards!

Laurence, I don't think it's fair to limit your analogy to credit card debt, you should include interest on all debt. Most people pay more than 11% of their income to service all of their debt (mortgages, car loan, student loans, credit cards). The standard in the mortgage industry is to allow people to borrow so that the total of their debt payments equals 36% of their income. And most of the payments (at least at the beginning of loans) go to interest. So if we assume that someone borrows close to the maximum that the lenders allow (which many people do), then there are a lot of people in thist country paying something close to 18% of their income or more in interest.

Most Americans are heavily in debt and are slaves to their debt payments. Therefore, it's no surprise that our government is too.

[Sandy]

Quote:

Originally Posted by CCdaCE How did this thread turn political?

Economic conditions and politics are intertwined.

Extreme political acts (terror) impact economic cycles, even when these events have little direct bearing on most businesses profitability. A stable political environment is necessary for a stable economy.

OTOH, natural economic downturns (or anticipated ones) result in the need for political diversion that takes the focus and pressure off pols to "do something" about the cyclical process that has to run its own course. Like the magician, get em focussing on something else.

[dex]

Quote:

Originally Posted by dex I guess I am posting this for the younger members on the board who have not experienced a recession and if you think about it unless you were born in 1960s and remember the recessions of the 1970s and early 1980s many do not really know what they are. If a recession dose hit then all the advise about not having debt and having a rainy day fund begins to mean something. I hope other knowlegeable posters contribute in a similar vain because the next few days due to the concerns about the stock market and sub prime loans the media will be talking doom and gloom.

Some of the replies have gotten off the point I was hoping for i.e. what previous recessions were like, what they experienced, what they learned and what might we be in for; if there is a recession. With the hope that it might help those who have not experienced one similar to those I noted at the start.

[CCdaCE]

Quote:

Originally Posted by dex Some of the replies have gotten off the point I was hoping for i.e. what previous recessions were like, what they experienced, what they learned and what might we be in for; if there is a recession. With the hope that it might help those who have not experienced one similar to those I noted at the start.

I appreciate your attempt.

Maybe my thinking is backwards, but worrying about housing/Markets/economy/personal debt in the short term is like paying attention to a kid with a slingshot. What we should really be doing is looking at long term. Pay attention to a guy with a gun -- the Fed. spending deficit/Medicare/SS spending. Then the boom will be really lowered.

It may be a long time off, but I'm only 29. What do I know.

-CC

[haha]

Quote:

Originally Posted by newguy888 Dex #3 the terrorist attack ..

In an interview about his sale of Equity office Properties Sam Zell offered the possibility of a terrorist attack as one reason why he wanted to unload, rather than wait for the possibility of top dollar.

Ha

[tryan]

Quote:

In an interview about his sale of Equity office Properties Sam Zell offered the possibility of a terrorist attack as one reason why he wanted to unload, rather than wait for the possibility of top dollar.

Commercial property I could see dumping ... but the residential market started a steep spike UP after 9/11. Apparently the nesting instinct took-off and had everyone building/wanting a home.

[Zoocat]

In the early 70s, I was in a young marriage with a new baby and my husband at the time had a job. We had no debt and only the basic bills so we hardly felt it. But my dad lost his job in the aerospace industry and with 3 boys and a wife to support things were very dicey for a while. He tried selling insurance but he didn't have the temperment of salesman. Luckily, he was hired back in a lesser position by an employee he had trained. That experience really soured my dad and turned him into a real cynic about his business. He couldn't wait to retire after that, although it took him quite a few years. He was really happy once he finally did.

Flash forward 35 years: my former husband last year was laid off by the company he had given his labor to for over 30 years. Now, in his late fifties, he works at Walmart.

[laurence]

Quote:

Originally Posted by JustCurious Laurence, I don't think it's fair to limit your analogy to credit card debt, you should include interest on all debt. Most people pay more than 11% of their income to service all of their debt (mortgages, car loan, student loans, credit cards). The standard in the mortgage industry is to allow people to borrow so that the total of their debt payments equals 36% of their income. And most of the payments (at least at the beginning of loans) go to interest. So if we assume that someone borrows close to the maximum that the lenders allow (which many people do), then there are a lot of people in thist country paying something close to 18% of their income or more in interest. Most Americans are heavily in debt and are slaves to their debt payments. Therefore, it's no surprise that our government is too.

I used CC to refer to unsecured debt. What does the U.S. have for collateral? Will we sell off national monuments? "The Sony Wega Grand Canyon!"... I agree that people debt finance, heck, I'm sure I'm right near the 36% when you include the mortgage payment, but I don't believe we are talking about secured debt.

But to try and be a bit on topic, I think there are a lot of young people on the board who feel very smart being 100% equities. That may be very smart in the long run, but if you only have 10 years to your hopeful ER date, a recession now could really slam you. A lot of people would rather use his/her money for better returns in the market rather than say, pay off the home. But be sure your time horizon really is long.

As far as another terrorist attack, I think, barring a nuke, the next attack will have less financial impact than 9/11. I remember everyone wondering what was going to happen, if we would be able to carry on. But pretty soon Paris Hilton was back on the front page again and people moved on. The next attack will cause outrage, certainly, but people will know that life goes on, this is the new normal. I know that sounds terrible, but I seem to remember Doolittle's raid on Tokyo causing widespread panic in that city. After a while, Tokyo got used to regular firebombing raids and went about life as best it could....