Economy still tightening

You feeling the squeeze yet? If you are, you're not alone. Millions of Americans are right there with you. Starry-eyed predictions that the mortgage crisis would quickly pass and America would be in good shape by the end of the year (last year) have proven to be ridiculously false. Not only that, the housing market is still falling further:

A widely watched housing index released Tuesday showed home prices dropping by the sharpest rate ever in the second quarter.

The Standard & Poor's/Case-Shiller U.S. National Home Price Index tumbled a record 15.4 percent during the quarter from the same period a year ago.

The monthly indices also clocked in record declines. The 20-city index fell by 15.9 percent in June compared with a year ago, the largest drop since its inception in 2000. The 10-city index plunged 17 percent, its biggest decline in its 21-year history.

No city in the Case-Shiller 20-city index saw year-over-year price gains in June, the third straight month that's happened.

And don't let anybody tell you it's bottomed out yet. It hasn't. It may be that it's slowing down, but it's still got further to go. It's a hard, hard hit for people who bought homes thinking they were rock-solid investments and a source of income, only to be rudely awakened when the American economy could no longer stand the strain of all that debt. And the news is not going to get better for a while. From Business Week Online:

Still, the loudest complaints on Main Street relate to rising commodity costs and inflation, especially expensive fuel and food. Gasoline prices have become a key issue in the Presidential campaign. U.S. consumers are spending less as retailers and restaurants struggle.

So have inflation worries finally replaced credit conditions atop the list of investors' biggest concerns? Is the credit crunch finally waning? Not a chance.

An August survey of economists conducted by the National Association for Business Economics did show an uptick in worries about energy prices and inflation, to 16% and 15%, respectively. However, 46% of economists said the credit crunch and the state of the financial system was their top worry.

Here's the thing: there is not going to be a point at which the housing market has bottomed out and the only direction is up. The problem is that utterly, fundamentally, the money has disappeared. Or rather, I should say, the illusion of money has disappeared. There was no real equity in those houses to begin with. Well, there was, but the banks told people that it's not actually just more debt. The illusion of money disappeared, but the debt didn't. When a new administration comes into office (because the current one obviously has no qualms with corporate misbehavior) it's almost certain that credit and lending regulations will be tightened with the probability of more legislation being passed. The circumstances that allowed this crash to occur are not likely to be present again for a long, long time. There have been other recessions, but despite the rhetoric issuing from this administration, this one is bad. We haven't seen the worst, and we have no way of knowing when we'll recover. The problem is really that the US's sources of income are pretty narrow. We make a lot of money off services. We no longer manufacture and export like we did, which is what helped us recover from the Great Depression and brought us our enormous post WWII prosperity.

Here's a fact: the economy will be given negative stimulus from the housing sector until housing demand is growing and high again. Here's another fact: according to the studies I've read and quoted in one of my other posts, If they quit building homes today, there would be enough of a surplus to last for two years or so (and longer if demand slows down even further). But it's a self-reinforcing cycle: the harder it is to get credit for a home, the fewer homes are sold. The fewer homes that are sold, the more the housing sector detracts from the market. This can last quite a while until other segments of the economy begin to make up for it and pump enough cash in to cause growth. If that occurs. I mean, it's not a given we'll recover. Cambodia was rich too, a long time ago.

Using that example, it may be that the death knell of the credit driven society is sounding. We may never borrow our way to prosperity again. The best time to make a commitment will be at our lowest point. That way the fewest people will be hurt. If this change does occur, we will be living in a vastly different society from the one our parents did. Of course, until consumer good prices come in line with consumer earnings, we may see sales of our luxury toys (like big screen lcd tvs) falling off sharply to reach the point where people actually have to save up money in advance to buy them. Wouldn't it be amazing? Inconvenient as hell, yes, but much more resistant to the kinds of slowdown we're seeing now. Our society may become merely as rich as the aggregate real wealth of it's people, not the aggregate amount of debt we can get into. Strange, I know. We'll see.