After suffering a huge loss yesterday, the Dow rebounded 110.78 points, putting it back in the positive for the year. (Barely) In spite of a dismal couple of weeks of trading, some analysts were maintaining today that after being oversold, stocks are making a bounce back. The reason some anaysts give- that the market is going to stablize, is the same reason that many anti-bubble guys give to show a bubble isn’t happening- the economy is fundamentally sound.
One of the more muddled issues in this debate is that state of the American consumer. Federal Reserve Chairman Ben Bernanke commented Tuesday that “U.S. households overall have been managing their personal finances well,” Bernanke said. “On average, debt burdens appear to be at manageable levels and delinquentcy rates on consumer loans and home mortgages have been low.”
Bernanke’s opinion of the state of the American consumer is not universal, however. According to the Wall Street Journal on June 9, “Despite expectations that cnsumers would begin to scale back borrowing, household debt grew at an 11.6% annual rate in the first quarter, up from 11.1% in the fourth quarter. Mortgage debt rose by more than $250 billion during the period. The Fed’s “flow of funds” report showed increases in the value of real estate as well as financial and other assets spurred a 2.7% growth in net worth in the quarter to $53.8 trillion, up from a 2.4% gain in the fourth quarter.”
The WSJ goes on to say “Many economists thought household borrowing would decline in the first quarter because of rising interest rates, which make mortgages, home-equity lines and other loans more expensive. ‘The big surprise to me is that households are still leveraging up,” said Bob Mellman, an economist at J.P. Morgan Chase and Co. “I had thought that higher interest rates, fewer home sales and less house-price appreciation might convince households to curtail borrowing. But borrowing is as strong as ever.”
The article was nicely summed up by a comment by Goldman Sachs cheif economist Jan Hatzius, “The first quarter was another big quarter for mortgage equity withdrawl.”
Given that the national foreclosure rate is 38% this year, it seems that not everyone is managing their debt levels well. Credit card borrowing, consumer buying are up, and household savings is basically non existent.
So how does this affect the housing bubble? Economists are predicting a slowdown in consumer spending. If its because consumers have decided to cut back and save more, that should give us the soft landing that many economists are predicting. However, if the slowdown is because consumers are tapped out in what they can borrow (and this is the model the numbers seem to bear out), and have no savings to fall back on, foreclosures and defaults will surely rise. As slowing growth increases unemployment, and as higher interest rates and soaring inventories continue to plague the housing market, a harder landing seems more likely.
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