From USA Today:
If you haven’t yet felt the impact of the nation’s credit crisis, just wait. Chances are, you won’t have to wait long.
So far, the turmoil may feel a bit remote for average people: Failed mortgage lenders. Gargantuan write-downs by banks. Foreclosures for people who couldn’t really afford the mortgages they got.
What about the rest of us? Are we in danger? No one knows for sure, but quite likely, yes.
As the credit crisis seeps into farther-flung corners of the economy, more of us will find it harder — and costlier — to borrow money. The value of the funds in our retirement accounts could shrink. People with subpar credit will likely find it more difficult to qualify for auto and home-equity loans. Even consumers who make the cut may need higher credit scores and more documentation.
With loans harder to get, people will hesitate to buy cars, boats and other big-ticket items. The gravest fear? That weak consumer spending — along with surging energy prices, a long housing slump and sluggish job growth — will plunge the economy into a recession.
Even if a recession doesn’t occur, “We’re going to be in for a rough ride,” says Robert Kuttner, a senior fellow at Demos, a New York policy organization. “With job creation slowing down, credit standards being tightened and housing values not going up anymore, the consumer is under pressure to tighten his or her belt.”
Tighter credit and falling home prices top the reasons why the economy could slip into a recession, according to 50 economists surveyed in late October and early November by the National Association for Business Economics.
Most economists still don’t foresee a recession. But the risk of a downturn is growing with each bout of bleak news. About 18% of economists who responded to NABE’s survey put the probability of a recession starting within the next 12 months at 50% or greater. That’s up sharply from the 11% of economists who said so in August.
A recession would inflict pain on a majority of Americans as unemployment rose and the stock market sank further. In a recession, “Investors have to be prepared to absorb a 20%-plus decline in the value of their portfolios,” says Ed Yardeni, president of Yardeni Research, an investment research firm in Great Neck, N.Y.
The initial low rates on adjustable-rate mortgages are resetting to higher rates. And with housing prices in many markets falling, overextended buyers can’t refinance. Delinquencies and foreclosures are rising. Banks and other investors holding downgraded securities tied to risky mortgages are writing down their values billions of dollars at a time.
Each week brings fresh evidence of how the credit crisis is causing damage. Last week, for example, the stock market fell after Goldman Sachs downgraded the nation’s largest bank, Citigroup, to a sell. Goldman said the bank would likely have to write down $15 billion over the next two quarters, mainly because of its exposure to risky mortgage securities.
And darker days probably lie ahead: Mortgage-related losses industrywide are likely to mount through 2009 and further bruise financial institutions, says Mark Zandi, chief economist at Moody’s Economy.com.
Such losses eat away at banks’ capital reserves. That means they can’t lend as much money. Goldman Sachs analysts predict that, overall, banks’ exposure to risky mortgages could reduce the credit available to consumers and businesses by a staggering $2 trillion.
Consumers who pulled money out of their homes as the market soared in recent years will also be in for a shock as home prices fall during the worst real estate recession since the Great Depression.
Kuttner says he believes that consumers’ recent “reliance on home equity and credit card loans isn’t because middle-income people are going on shopping sprees, but because wages are squeezed.”
Home-equity withdrawals accounted for up to $324 billion a year in consumer spending from 2004 to 2006, according to estimates from Federal Reserve economist James Kennedy, based on a paper he wrote with former Fed chairman Alan Greenspan. These withdrawals and related consumer spending plunged in the first half of this year as the housing market weakened, according to updated estimates from Kennedy.
This real estate recession is the worst since the Great Depression, affecting almost every part of the housing market, from construction to lending. A turnaround is not expected until the second half of next year and the financial aftershocks from rising foreclosures will be felt for at least another six years.
The confidence level of home builders remains at a 22-year low, and the National Association of Home Builders repeated last week that it doesn’t expect the decline in new home construction to bottom out until the second half of next year.
“Builders do not see any significant change in housing market conditions as compared to last month,” NAHB chief economist David Seiders said in a statement, and special sales incentives are having limited success in attracting home shoppers.
D.R. Horton, the second-largest home builder, said last week that 48% of buyers canceled their contracts in the July to September quarter, and that housing market conditions continued to decline in that period.
But the pain is not being felt evenly across the country. Home prices fell in 17 states during the last year, but most states “continue to have stable home values,” and a half dozen others even showed moderate price growth, according to an analysis of repeat sales last week by First American LoanPerformance.
Worst hit were California, Nevada, Arizona, Louisiana and Florida, where prices declined 5% to 10%.
Almost 16% of homeowners who bought in the past two years owe more on their mortgages than their properties are worth, Zillow.com says.