ECONOMIC OUTLOOK Over twenty years of proven expertise and trend analysis in evaluating residential property values. |
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To help our customers better understand current market conditions and projections, Local Market Monitor provides periodic analyses of national economic trends and their impact on real estate markets. This analysis, developed by Ingo Winzer, reflects his view on the current outlook for the national economy. National Economic OutlookJuly 17, 2008 The health of the national economy is closely tied to the financial health of the average consumer, which currently is not good. The recent swoon in the stock market doesn't affect most consumers directly, because they don't own stocks and bonds [their 401k plans do, but consumers can't get their hands on that money anyway]. The drop in home prices is a more serious problem, both psychologically and because consumers can no longer take equity out of their homes and spend it. Average home prices dropped about 5 percent in the past year, much more in some local markets. This is a very large drop and will be followed by more declines in the next few years. Not only will consumers have less equity to borrow against, but banks will be less inclined to make a home equity loan when the value of the collateral is falling. Consumers who already have a home equity line of credit are drawing that credit at a record rate: the amount grew 12 percent in the past year, compared to four percent in previous years. The phenomenal growth of the US economy in the past decade was fueled by consumer spending, which in turn was fueled by consumer willingness to go deeper and deeper into debt. Adjusted for inflation, the amount of credit card and auto debt jumped 30 percent in the past decade, to $8,000 per man, woman and child. In the process, monthly debt payments jumped to almost 20 percent of consumer after-tax income. Debt-fueled consumer spending can't last forever, and now the party's over. Every time consumer debt peaked in the last 30 years, a recession followed, five times. Well, consumer debt per person peaked last September, which leads me to think a period of adjustment will now take place. The average adjustment period in the past was two to three years... In addition to problems with debt, consumers also face problems with jobs. Compared to last year, the total number of jobs in June was about flat. In a healthy economy, jobs usually grow 1 to 2 percent per year. Below the surface, the details paint an even more ominous picture. By and large, jobs were lost in industries that pay higher wages, and were gained in industries that pay lower wages. 500,000 construction jobs were lost, 300,000 manufacturing jobs, 100,000 finance jobs, and 250,000 jobs in employment services. On the lower-paying side, 100,000 jobs were gained in education, 300,000 jobs in health services, 200,000 jobs in restaurants, and 100,000 jobs in local government. The 500,000 jobs lost in construction are a special blow to the economy, because the former holders of those jobs tend to be young, free-spending, and fond of buying pick-up trucks. Although the sharp drop in new car sales this year is generally blamed on high gas prices, the bigger problem for US car manufacturers is that consumers just don't have the credit to buy those cars any more, especially the pick-up trucks and SUVs that provide most of their profits. ARCHIVED OUTLOOKS
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