Thursday, January 22, 2015

Housing Sales, DEBT (Both Individual and National) and Student Loans Remain Big Headwinds for Strong Economic Growth

The U.S. economy is still healing from the recession of many years ago, but it's definitely not strong. In fact, this has been the weakest economic recovery in our nation's history and the only one in which median household income dropped. Let's explore a few of the reasons why.

Housing sales are improving but still remain ~50% below their peak in 2006. One big problem is the relationship of excessive debt to income for too many consumers and otherwise first time home buyers. And unpaid student loans coupled with no or low paying jobs are the elephant in the room.

Although it's the historically high debt levels and the weak economic recovery that are weighing heavily on both the housing market and lack of good paying jobs for the young, President Obama never once uttered the word DEBT in his 'save the middle class' State of the Union address Tuesday evening. I guess it doesn't worry him as he waxes on about piling on more debt with more government spending for 'free' college and raising the minimum wage. Either that or he doesn't want us to think about what's happened on his watch. Oh well, truth is truth and facts are stubborn things. So with that in mind, let's reveal some basic problems associated with housing and the young.

Economists See Housing-Market Pickup has the story:

"Economists at the International Builders Show said that while 2014 proved disappointing they expect construction and home buying to accelerate in 2015, driven by strong job growth and improving consumer confidence.

Housing has been unusually slow to recover from the housing crash and recession. Economists typically expect the housing market to surge when the overall economy picks up strength.... Single-family home starts peaked in 2006 and haven’t come close to that level since.

The health of the housing market has implications for the broader economy because home sales and construction stimulate job growth directly through construction jobs and indirectly through many products and services that support housing. And when consumers buy homes, they often also buy furniture and many other home equipment and supplies. . . .

Still, the economists noted that the market continues to face significant challenges.

David Berson, chief economist at Nationwide Insurance, noted that 10% of homes with mortgages remain underwater, or worth less than what the borrowers owe on the home. He also noted that household formation—the biggest indicator of future home buying—remains sluggish, particularly among homeowners in their 20s, 30s and 40s.

The economists also pointed to student loan debt as a looming cloud over the housing market .... with more than 40% of households between 20 and 29 with student debt as of 2013.

Moreover, those with student debt now tend to have less education making repayment more difficult. In 2001 more than 70% of those indebted households had at least a graduate degree, compared to about 35% in 2013."

Summing Up

The 'good old days' in the housing market are gone. The bad new days of excessive debt are here.

Debt is the biggest problem facing our economy, and our nation's overall enormous indebtedness (student loans, car loans, credit card loans, home equity loans and home mortgages, as well as the national debt, both recognized and ignored) will make the ongoing economic recovery weaker and longer than historically has been the case.

We've borrowed and spent the money that we didn't have to spend. It's time to pay the piper.

That's my take.

Thanks. Bob.

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