With the slowdown in the housing industry, the GDP will substantially be affected as well. What could further aggravate the situation is the clampdown of the sub prime lending because of a surge in foreclosures on high risk mortgages. To quote Saskia Scholtes of the Financial Times: “Delinquencies and foreclosures among high-risk borrowers increased at a dramatic rate…. foreclosure rates were already 6. 09 per cent by December, while 5. 52 per cent of borrowers were late on their payments by more than 30 days….
Lenders also began shutting their doors, sending shock waves through the high-risk mortgage markets” (Scholtes). As a result of the clampdown on the subprime mortgage industry, federal rates up and incentives are down. According to the National Association of Realtors last May 08, 2007, “U. S. home-price declines this year will be steeper than earlier forecast because of the drop in sub prime mortgage lending and the adoption of stricter loan standards” (Clothier, 2007).
As a further impact of these, entire fixed rate loans are harder to come by; there are stricter federal guideline implementations and fewer first time buyers will qualify for a loan. If this go on for a much longer time, consumer spending – especially for houses will affect overall consumer and economic activity and the domino effects in the US economy will be felt soon enough. One other factor that comes into the present investment environment is the continuing increase in the price of oil. Consumer activity is further dampened by this disturbing trend.
We all know that when oil prices go up, all the prices of other consumer products go up as well. Consumers know this and when bracing for the worse, consumer spending is slowed down. People tend to hold on to their money at times like this. To further illustrate, Daniel Pimlottin wrote in his article entitled “Housing slump brings woes for Lowe’s” in the Financial Times published last may 22, 2007: “Last week, Home Depot said its earnings had fallen 30 per cent in the first quarter as housing troubles and high energy prices depressed consumer demand” (Pimlottin).
Clearly, there is a slowdown in home prices in more cities than there is appreciation in some. In Table 1, we can pinpoint 14 cities that have two digit appreciation indexes. However, there are 84 cities that have negative increase or depreciation in residential home prices or a flat line which is neither an increase nor decrease. All is not lost though. The future is not that bleak either. There are some positive factors and developments today that were not present in past housing booms and bust cycles. For one, unemployment is still at a low and manageable level.
It is just 4. 5 per cent as of April 2007 (Growth Conundrum, Financial Times). Growth is slow at 2 percent (Growth Conundrum, Financial Times) but at least inflation rate has also slowed to 2. 3% – also as of April 2007 (Pimlottin, 2007). Interest rates have been maintained at 5. 5% by the Federal Government (Pimlottin, 2007). However slow, a positive growth in the US economy is still a postive sign that the Federal government agencies are looking for. Although at 2 percent, it is not enough to warrant a decrease in interest rate since August 2006 (Pimlottin, 2007).