Jennifer Gorton
In 2008, the Subprime Mortgage Crisis threatened to undermine the entire global financial system. What began as a normal recession quickly turned into an economic tsunami as banks around the world began to realize to what extent their books were exposed to subprime mortgages. Central banks and world financial leaders around the globe came together in a step of unprecedented political unity and slashed interest rates to historically low levels and injected massive amounts of stimulus into the global economy in order to stem a complete financial meltdown. Of course, the quick action by financial leaders around the world was able to fight off a complete meltdown and by the spring of 2009 it appeared that the recession in the United States had bottomed out. Equity markets began to rise again, the housing market seemed to begin showing signs of stabilization and unemployment peaked. Investor sentiment began to improve around the world and it seemed that the biggest financial threat since the Great Depression had been subverted. In fact, Ben Bernanke was named Time “Man of the Year.”
Thus, the economic rebound continued to gain traction throughout the spring of 2009 and into the summer and fall. The $8000 First Time Home-Buyer Tax Credit seemed to be causing a strong rebound in the housing market and, generally, things were looking good. Then, in the late fall of 2009 the EuroZone Debt Crisis hit. Again, world markets went crazy and risk aversion gripped investors. However, the U.S. recovery continued to show signs of steady growth. At the Federal Reserve, behind closed doors officials began talks of when it may be appropriate to begin removing the unprecedented monetary stimulus that was still present in the U.S. economy. And this was the state of the U.S. economic recovery until June.
In June, the economic recovery began to show signs of severe slow-down. Retail Sales decreased, consumer spending decreased, consumer confidence decreased, unemployment remained stubbornly high, and, perhaps worst of all, the housing sector began showing signs of possible contraction. The housing sector is, of course, what led the economy into recession, and at some point the housing sector will have to begin leading the economy out of recession. Once the $8000 Tax Credit expired, New Homes Sales plummeted. Housing prices are still falling.
Recently former Federal Reserve Chairman Alan Greenspan was interviewed on NBC’s “Meet The Press,” and he was asked if a double-dip recession was likely in the United States. His response was, “It is possible if home prices go down. Home prices, as best we can judge, have really flattened out in the last year.” He continued by adding, “If home prices stay stable, then I think we will skirt the worst of the housing problem. But right under this current price level, mainly 5,7 or 8 percent below, is a very large block of mortgages, which are under water, so to speak, or could be under water. And that would induce a major increase in foreclosures, foreclosures would feed on the weakness in prices, and it would create a problem.”
Alan Greenspan confirmed the fact that housing sector activity is the key to economic recovery in the U.S. The truth is no one knows for sure what the next 6 months will hold in the U.S. In Mr. Bernanke’s testimony before Capitol Hill last week he stated that the economic outlook in the United States is “unusually uncertain.” Due to the extensive bailout packages that the Federal Reserve has handed out to Fannie Mae, Freddie Mac, and other lending institutions, many U.S. homeowners have been able to modify their loans so that they could afford monthly payments, but experts fear this is simply a temporary fix and that eventually many of these modified loans will once again fall into default. In most real estate markets across the United States, prices are still falling, which means that homeowners are continuing to lose wealth consistently, and buyers do not have strong incentive to enter the market. The incentive for buyers over the last two years was huge with the $8000 Tax Credit, but as prices are expected to continue falling in the near term, many buyers will be waiting for lower prices. Housing numbers in August should give us another clue concerning where we are in the recovery. If New Home Sales and Pending Sales begin to surprise to the upside, we may begin to find some traction to begin moving forward, albeit at an extremely slow pace, for the remainder of 2010. However, if figures do in fact confirm a further slowdown in housing sector activity, investor sentiment and consumer confidence will most likely continue to decrease, which will serve to weigh on equity markets and those who trade currencies, as well as the entire economic recovery in general.
About the author:
Jennifer Gorton is the content manager of Forex Traders. Her main task is to make sure all the articles on her site are very educational and useful while also planning out new ideas for the ever-growing financial widget section. She has recently expanded her knowledge on certain industry aspects and is quite thrilled to share the information she’s discovered.
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