Subprime: Housing Industry Crisis to Damage Entire US Economy

The popular press is busy reassuring Americans that the wobble on Wall Street won’t cause them any trouble. Two major reasons are given:
 
First, Wall Street’s woes are traceable to subprime lending – and that, as we all know, is a containable problem. After all, said a report on MSN MONEY, the entire housing industry is only a US$1.5 trillion industry.
 
Only? That’s more than 10% of the entire economy. The GDP growth rate is only (officially) about 3%. A one-third cutback in the housing industry would mean negative growth in the economy – a recession. And it could be a long, deep recession.
 
“Housing to weaken even further,” says the Wall Street Journal.
 
The Washington Post adds that it is becoming hard to find a lender will give you a No-Money-Down mortgage.
 
Where does that leave the housing industry? D.R. Horton (NYSE:DHI), one of the biggest builders, announced its first quarterly loss in 15 years of doing business. Weyerhaeuser (NYSE:WY), a major supplier to the homebuilding industry, says its earnings are off 89%. And American Home Mortgage (NYSE:AHM), a major lender, has been cut down to a penny share; you could buy the shares last week at 69 cents. Better move fast; if the rumours are correct, it will soon cease trading.

The second reason given for why we shouldn’t worry is that overseas economies are strong and growing fast. They are buying more and more imports from the US, say the analysts. But the last time we looked, manufacturing was still shrinking in the United States. How can a declining sector prevent a general decline in the economy?
 
The credit bubble has been a fantastic boon to foreign manufacturers. Capital was never easier to get. And Americans would buy any and all the junk they produced. Now, these same producers are America’s competitors. And when the slump in the Unites States forces consumers to curtail their buying, foreign manufacturers will have to quickly refocus on their own domestic markets…competing with products provided by US exporters.
 
The US has neglected capital investment…and the manufacturing sector generally…for a quarter century. How will it now export its way out of a recession? Beats us…

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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T. Vijayendra
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I just discovered this site. Very intelligent articles! Will regulary get educated. Thanks.

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