Tuesday, August 9, 2011

Comments on the economy

It's been an active few days and weeks for economic developments around the world, and everyone wants to know what it all means. Experts on all sides have been weighing in.

Paul Krugman's Sunday column "Credibility, Chutzpah and Debt" has generated a lot of buzz in the media and blogosphere. Associate Professor and Graaskamp Center Academic Director Morris A. Davis says he agrees with about two-thirds of the article.

[And] Neither do market participants ... Treasury yields fell today! So the decline in stocks is about risk or a revision on future growth expectations. (I don't agree with Krugman's assessments that our budget problems are so painlessly fixed).

Davis also notes that the S&P is down nearly 17% in the past 2 weeks which may signal the start of Europe's (2nd) financial crisis and wonders if the big European banks are insolvent.

The housing market continues to depress the U.S. economy ("Why the housing market is still dragging down the recovery," Washington Post, 8/9/11)

A weak housing market can have other adverse effects, too. Some 28 percent of homeowners with a mortgage owe more than their property is worth. That’s bad for obvious reasons—those homeowners are more likely to default and be foreclosed on—but it can also hurt economic output, if it prevents people from moving to take jobs. “A homeowner who is underwater might hesitate to take an opportunity in a different location, because they’d have to move and write their bank a check at closing,” says Morris Davis, an associate professor of real estate and urban land economics at the Wisconsin School of Business—though, he cautions, this effect still isn’t entirely visible in the data.

Beyond wondering about the big picture, the next question people are asking is what does it mean for consumers? See "Downgrade on US debt could translate into higher interest rates on credit cards and mortgages" from yesterday's Washington Post.

And just like a lower consumer credit score implies that a borrower is a less reliable, a lower credit rating for government bonds implies there is more risk involved in lending money to the government.

Prices for U.S. government debt rose in the first few hours of trading on Monday, a sign of increased demand despite the downgrade. But it is unclear what will happen in the long term, because of the unprecedented nature of the lower rating and the decisions by Moody’s and Fitch to keep their highest ratings for now.


S&P’s downgrade may have several implications for homeowners.

For starters, early Monday S&P downgraded the credit ratings of mortgage giants Fannie Mae and Freddie Mac, which are both backed by the U.S. government. That could mean higher mortgage rates for new borrowers.

Variable rate mortgages and home equity loans could become more expensive as well.

The high failure rate for adjustable rate mortgages during the housing meltdown means that today the number of new home loans with adjustable rates is minimal — less than 5 percent of the market, according to Stephen Malpezzi, an economics professor at the University of Wisconsin Business School who follows the housing market.

But Malpezzi still has concerns. Consumers should be aware--even in the best of times, but especially now--of the terms of their financial contracts like mortgages and credit cards. "An amazing number of people don't even know if they have an ARM or a fixed rate," said Malpezzi.

Start with these questions from the Associated Press's article "How to learn if the US downgrade could affect you"

Do you have a fixed-rate mortgage or an adjustable-rate mortgage? What might cause your interest rate to change? How often could it adjust? And what about your credit cards? Do they have a fixed or variable rate?

Research shows many people can't answer these questions.

Consumers need to check the fine print of mortgage documents and credit card agreements.

Here are some questions to ask as you try to assess whether your loans could be affected by the market turmoil:
  • Can my interest rate increase?
  • What benchmark or index is my loan or card tied to?
  • How much might my monthly payments increase?
  • How many times per year can my rate adjust?

Davis does see a glimmer in the unemployment figures.

...unemployment rates among professionals remain much lower than the overall unemployment rate. The nation's jobless rate was 9.1% overall in July but 4.7% for management, professional and related occupations, according to the Bureau of Labor Statistics.

That relatively strong job market for professionals bodes well for developers building upscale apartments, said Morris Davis, University of Wisconsin-Madison associate professor of real estate.


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