San Francisco Mortgage News

Tuesday Trivia

Let’s take a look at recent developments:

First, you may have noticed that retail purchases improved in October. Consumer spending was up 0.4%, following a 0.3% rise in September. What we’ve long known is that we need a better employment situation and more retail sales to help develop more confidence among American consumers. Without those ingredients, the real estate market is very unlikely to improve. With them, added confidence inspires people to begin contemplating the purchase of a home, among other goods and services.

But there is a serious problem here. If consumers are suddenly spending more of their money, rather than paying down their indebtedness and rebuilding their savings, then they are meandering into a vulnerable position again. On the one hand, they are providing a short-term boost to the economy with their added purchases; on the other, they are denying themselves the long-term advantage of stronger personal financial profiles, which would support sustainable economic growth in the future.

The really good news, though, was that personal income grew in October by 0.5% (after a flat September), and the income growth was derived primarily from improvements to wages and salaries. In other words, consumer spending rose because consumers genuinely had more money to spend, and it looks like the increase in their income has the whiff of possible permanence to it. This even allowed the savings rate to rise from 5.6% to 5.7% in October.

Further, at the end of last week, we saw the number of new claims for unemployment insurance take a genuine dive, falling from 439,000 to 407,000 in the week ending November 20. This is usually pretty volatile data, so don’t count on it turning into a strong trend. This could also be seasonally influenced by temporary jobs obtained through the holiday season. Still, the news is good. And at the least, it can provide a bit of comfort in the face of the weak sales data for existing homes and new homes.

Meanwhile, the headlines in the financial press have been full of Ireland’s debt woes and the rather shocking state of the nation’s banks, which treated the real estate boom as a party they just couldn’t say no to and made loans they never would have contemplated only a year earlier.

Looking at the growing worries about Ireland—and Greece, Portugal, Spain and, face it, the euro itself—Brian Yelvington, the fixed-income strategist at Knight Capital, opined (in The Wall Street Journal), “I think that’s the market realization: that these are systemic problems that are going to need a systemic solution. This is not a one-off problem with an individual country.”

The truth in this statement is underscored by a careful look at Ireland’s woes. Banks built up huge debts that can no longer be serviced; the government agreed to nationalize those debts, so they are now the nation’s debts. Sound familiar?

The truth, it seems, is that this is no way to run an airline—or an economy. It’s “moral hazard be damned,” and it eats into the nation’s (and, over time, the world’s) ability to pull itself out of its debt dilemmas and into sustainable economic growth.

It is a political/economic system that didn’t work and that we are now trying to resolve by propping up the sources of the problem, sending in the foxes to repair the henhouses, rather than changing the system itself. This may be the most serious problem facing us today. Does our economy support all the people who are diligently participating in it, or are the people supposed to support the economy (and the few who still make billions from it) at the cost of their quality of life?

Overall, with all the uncertainty and anxiety in the world, we must all remember that tis the season to be jolly!  Deal with it during the day and then when you get home, put it all behind you, give your significant other a hug and kiss, check in on the kids, and pat the dog (or cat) on the head! Remember, the people in our lives are what is important and the thing that we tend to take the most for granted.  Happy holidays!