recession is coming

Economy

Housing Meltdown

Surely can hurt

Housing & Economy: Like it or not, recession is coming

If last quarter with 0.6% GDP growth was bad, current quarter can be even worse as credit and housing problems are expected to show its true impact on consumer spending.

Housing so far is not showing it's true impact on economy as far as GDP figures are concerned due to rise in rent for housing, because high foreclosures are creating demand for rented housing. This rise in rent make's housing to look much stronger in GDP figures despite the consistent fall in real-estate prices.

But as the time pass by this positive impact of rising rental will be shadowed by the declining consumer spending because of two reasons

Higher rent will itself had an effect on spending
Lower real-estate prices will certainly hit consumer confidence and then consumer spending.

Lower interest rates were expected to help housing market but due to more tough regulation any benefit of low interest rate will be neutralize by low participation of borrowers due to high entry barriers.

Stimulus package is not likely to have much positive effect, because most part of money is expected to go into saving to cove-up declining real-estate prices.

Housing and Economy

Housing itself is enough to take economy into recession if housing market don't show improvement from current situation and stay as now then recession will be mild and short, but if it go worse than this recession will be deep and long.

Business failure not economic failure or correction.

Housing meltdown and credit crises is a business failure not a economic failure because it happened due very much avoidable reasons like

Excessive liquidity in money market and easy availability of credit.
Easy credit norms or ignorance of credit norms by lenders.

#Possible Remedy

Since this is business failure the best way to handle this is to think from a business point of view

Instead of offering a broad base stimulus package Govt. may could have created a agency that offer support to troubled Borrowers not by refinancing their loan (many agencies are already doing it) but in-fact by offering most troubled borrowers (who are in no condition to save their home) a more reasonable price for their property during pre-foreclosure period, and to make it a business sense it can offer prices 5-10% below current market price.

This will help in multiple ways

For borrowers

Borrowers will get good value for their property, that will left them with some amount of cash in hand for future (Normally during pre-foreclosure period property sold 20-30% below their market value).
No adverse effect on credit rating.

For lenders

Lenders will get back their cash quickly.
Less write-off in lenders balance sheet.
Strong cash flow and less weak balance sheet.

For citizens including taxpayers

No major downturn in real-estate prices as Govt. can hold property for longer than any other company.
Taxpayers money will be used for a good cause that also make a good business sense so no reason for taxpayers to object.

This article reflects personal view of the author and one must consult its financial adviser before making any investment decision