Signs of Recession in US Grow, Led by House Prices, Mortgage Payments

In the next 18 months, about 2.5 million households are supposed to be affected by mortgage rate adjustments. The total of the mortgages is about US$350 billion. First think about this: If the dollar were still worth what was worth five years ago, Americans could save about US$500 billion on their foreign purchases – in one single year! The value of all US assets is about, say, US$50 trillion. A 20% cut is equivalent to a loss of wealth equal to US$12.5 trillion…it is almost as if every single publicly traded company in the United States had gone broke.

Fed rate cuts are supposed to avoid a recession…so Americans don’t get poorer. But the lower dollar makes them poorer anyway.

Now, consider this: Most of those subprime mortgages will be adjusted, not based on the Fed funds rate, but on the London InterBank lending rate. And long-term mortgage rates are not the same as the short-term rates. When the Fed cuts rates, it signals to lenders that inflation will increase. This pushes up rates on long-term loans – such as mortgages. So, when the Fed announced its cut last week, long-term rates actually rose almost as much as the Fed’s half of a percentage point cut. Now, according to the Financial Times, the typical subprime mortgage will be reset to a rate around 10% – a huge increase in monthly expenses for the poor homeowner…and the effects (as we have seen) will be felt throughout the global economy.

Meanwhile, so many negative indicators are coming into Markets and Money headquarters that we feel we need to call in an exorcist. Is a recession on its way? It looks to us as though it has already begun:

Housing inventories are at an 18-year high.

Housing sales (resales) are at a 5-year low.

Housing prices, according to Case/Shiller, fell in America’s top 20 cities last month – 3.9%.

Late payments are running well above the historical average.

More than 150 mortgage companies have closed up shop.

While the value of Americans’ number one asset is going down, their living expenses are going up. And it looks to us as though they are going to go up a lot more. Why? Remember, there’s a war of prefixes going on. There is no doubt that we are living in a ‘flationary’ world. But what kind of ‘flation’? “In” or “de”? Each time we approach the question, we hesitate; but now we can give you a definitive answer: Both.

The ‘flation’ in the housing market clearly needs a ‘de’ in front of it. And so does the entire subprime US economy. Yes, dear reader, it is a subprime economy. Like the subprime homeowner, the whole US economy has too much debt, and a lifestyle it can’t really afford. The Fed’s grand gesture (offering more credit) looks good on TV (the yahoos watching James Cramer must love it) but it doesn’t make the debt go away…it can’t really stop the inevitable deflation of US financial assets…and it actually increases pressure on the typical household, because it forces up prices.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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2 Comments on "Signs of Recession in US Grow, Led by House Prices, Mortgage Payments"

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A great big Thank You is due to Mr. Bernanke and his FED rate cut: Thanks a million, bud. You saved the butts of your rich friends, but today, my loaf of bread was up a dollar and the bank sent me an urgent letter informing me that they’d lowered my interest rate on savings by your 1/2 a percentage point: prices up, value of dollar down for us po’ folk, and the rich get richer.


What are you talking about? A loaf of bread? A savings account? If the FED does not stop the decline in real estate prices, we will all have nothing! The average Americans’ net worth is all about real estate. I don’t know anyone who has a savings account. We all have homes. We own a small piece of America. Who cares how much a loaf of bread is. When my house drops 10% in value, 30% of net worth is destroyed. Since very few of us are international investors, i could care less about the value of the dollar.

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