Monday, January 19, 2009

The Recessive Economy - It began with Housing, it'll end with Housing.

Given today's current economic circumstance, people wonder when it will ever end. For now, many people are looking towards the promises of politicians, with their bailouts, stimuli packages, and promises of infrastructure spending hoping as though this will be the source of the solution to today's current financial crisis. Recovery from this recession will happen. This economist however, predicts that recovery will occur from another angle entirely.

The current financial crisis all started with a collapse in housing prices, and recovery for America will begin with a recovery in this sector.

The economic sense is simple. With housing finance issues that constrict the consumer, its only natural that consumer confidence will return once this is dealt with. As prices stabilizes, real stimulus will occur as people qualified for refinancing are saved money each month due to lowered and stabilized housing prices. Take for example, a household paying saved $300 per month every month through a simple mortgage refinance. $300 dollars may seem like a trivile amount, below the radar, but the road to recovery will be built as we take these savings per month and multiply it times thousands of refinances. Unlike the $600 government checks sent out last year (which rationally risk-averse people simply put away in the bank), these small drops in refinanced, stabilized mortgage rates, when multiplied by hundreds, will in due time result in people finally having discretionary spending once more.

This will lead not only in more capital accumulation, in which banks will finally be able to unfreeze their lending. With the mortgage pressure eased on the consumer I predict that they will finally be able to spend on raising the property values on their homes as Americans traditionally do. There will be increased demand in sectors relating to housing: furniture, landscaping, etc. People will want to spend money on their homes again, which means more money for retailers such as Home Depot, Lowes, and furniture stores in general, who will in turn be placing more factory orders for such products, and resulting in more expansion (and a demand for more hires in general).

As people reinvest in their homes, new hires will be inevitable. As America's Joe the Plumbers, Bob the Builders, Larry the Cable Guys, etc get new contracts to service the homes of these people who've gained more discretionary income from months of mortgage stability, its only natural that the volume of these new contracts will incentive small businesses to accumulate new servicemen abroad and the physical capital necessary for them to do their jobs. The economy will recover in this way, once real stimuli is created by dealing with the pressure people face holding on to their homes. It will not come from any democrat plan, though they will no doubt in inadvertently get credit for recovery. If Washington really wanted to have this problem solved sooner then later, then stacking the recovery work occurring in the mortgage sectors with a tax cut will get us there all the sooner. The key is not a one time stimulus; its to give people money they can count on in the long term.

Give America that, and America will put herself back on track.

~David Morris~

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