TBP Part 1: The Housing Market & the American Economy

"I would say that as housing goes, so goes the economy."

I have been thinking about this for months before David Rosenberg, chief US economist at Merrill Lynch, said this on Tuesday. The housing market has grown at an unsustainable pace and especially so in certain markets on the west and east coasts. What has helped float our "economic recovery" is the infusion of capital from home equity. People have been cashing in with refinancing and have been pumping the cash back into the economy. Consumer spending is what has helped to drive the economy as people buy their SUV's, Ipods, and flat screen TV's. So what happens when the housing market slows down and provides people less capital? This "economic recovery" seems to be built on a big lie: it has been financed by debt that will eventually have to be paid back!!!

Many economists feel that the housing market will flatten and perhaps they are right, but what will happen to all those who people took risky mortgages to purchase homes they could otherwise not afford. These people came in hoping they could cash in and if the market flattens or even reverses, as can definitely happen in certain areas, many will be left hung out to dry.

But here's the bigger picture: the US dollar has been predicted to weaken by many and has yet to do so because Asia, mainly China, and other foreign markets continue to buy US Dollars. (The trillion dollars of t-bills held by China and others helped to make morgates cheaper by the way) The Euro was predicted to out-perform the Dollar but turmoil in France and the European Union undermined that. If foreign investors start worrying about the US debt (which is huge all around and growing), and if the Euro gets stronger, then the Dollar will get more expensive for us at home as interest rates will rise to make it more attractive to foreign investors. Rising interest rates mean higher mortgage and credit card payments which eventually will mean less buying, more defaulting, and a weaker economy.

All of this and I have yet to talk about oil and gas prices....