- Font Size:
- Default font size
- Larger font size
BY KEITH BENMAN
kbenman@nwitimes.com
219.933.3326 | Sunday, May 11, 2008 | (1 comment(s))
In the spring of 2006 home sellers and buyers in some major U.S. markets started to notice something that hadn't occurred in more than a decade: housing prices were going down.
The loss in home values was accompanied by an upsurge in foreclosures, much of it due to the loose lending practices that boosted home prices in the first place, according to Donald Coffin, a professor of economics at Indiana University Northwest.
As home sales slowed, employment in home building collapsed, followed by a drop in auto production, as credit tightened and people bought fewer cars.
"You add all those things up and it adds up to recession," Coffin said.
In the past three months, U.S. employers have shed 260,000 jobs, according to the U.S. Bureau of Labor Statistics. The national unemployment rate hit 5.1 percent in March, after standing at a seven-year low of 4.4 percent a year before.
In Northwest Indiana in March the unemployment rate was 5.6 percent, with 1,713 fewer people working than one year before.
The classical definition of a recession at one time was two straight declines in U.S. gross domestic product, which hasn't occurred yet. First quarter GDP was weak, a 0.6 percent according to preliminary figures. But it did not drop.
But the National Bureau of Economic Research, which officially "declares" recessions for the U.S. government, now says it uses a broader definition that includes real income, employment, industrial production and sales. In an online briefing on its methods, it notes it does not declare the beginning of a recession until six to 18 months after the fact.
Coffin said everyone seems to be thinking we are in a recession, but only time will tell if it's that -- or only a slowdown or slump.
"This all will really ripple through the economy," Coffin said. "It's hard to say where it will hit next."
The uptick in home foreclosures first noticed in 2006 has since turned into a tidal wave of foreclosures in some states. It's now known as the subprime crisis, so-named for the risky home loans that account for the vast majority of defaults.
Adding to everyone's anxieties are record-high gasoline prices and steep hikes in prices for basic foodstuffs like eggs, milk and wheat.
The dominant theme now is caution, said Bala Arshanapalli, a professor of economics at Indiana University Northwest. That goes for both policy-makers and consumers.
Consumers should be thinking about paying down debt and perhaps even saving, if possible, Arshanapalli said. A good place to start would be the economic stimulus checks taxpayers are receiving from the U.S. Treasury.
"You do have a lot of bad news out there,'' Arshanapalli said. "I would be very careful how I spend that money."
Consumer Credit Counseling of Northwest Indiana has been hearing the bad news for two years, as people with adjustable rate mortgages get hit by interest rate increases.
Some have been able to handle the increases, but job loss and medical bills have pushed many over the edge, said Pamela Stalling, Consumer Credit Counseling executive director. Now they are struggling to keep their homes.
"We have more and more people coming in at the last minute, and often it's too late," Stalling said. "That's why consumers need to know more."
So far, policy-makers' responses to the crisis seem to have worked to stave off any kind of collapse in financial markets, Arshanapalli said. The Federal Reserve has taken a number of steps, including making $218 billion in low-cost loans to investment houses.
"The Fed is doing everything it can to soften the blow on the average person," Arshanapalli said.
The Fed's action to stave off collapse at investment firm Bear Stearns and arrange for its sale to JPMorgan Chase grabbed headlines as a "bailout." But it wasn't Bear Stearns the Fed was worried about, it was all the firms that had invested money there, Coffin said.
"The Fed clearly thought there was a real possibility of a financial meltdown," Coffin said. "This will all just kind of ripple through the economy. It's hard to tell where it will hit next."
Back to story 1 comment(s)
- It wasn't clear, concise or focused on the topic in the story.
- It was a personal attack, vulgar, explicit or degrading, used actual or implied profanity or contained potentially libelous statements.
- It accused someone of being guilty of a crime.
- It promoted violence or illegal acts.
- It contained telephone numbers or street addresses, or e-mail addresses and links to Web sites other than nwi.com or government agencies.
In no way do these comments represent the views of The Times or Lee Enterprises.
Passionate views, pointed criticism and critical thinking are welcome. Name-calling, crude and profane language and personal abuse are not welcome.
Reader comments will not be edited - they will be approved or declined. They may be used in the print edition of the newspaper.
If you feel a posted comment has violated these guidelines, please email our New Media team the commenter's name, the comment and a link to the article.
For more information please read our Terms of Service.
Post a comment Once your comments are approved, they will appear here.
» More Business Stories
- Professionals on the move
- Show concern, but be direct when laying off workers
- Subprime loans taking homeowners down
- As food costs soar, restaurants swap ingredients to get by
- EYE ON THE PIE: Indiana's new leadership at the State Museum
- BUSINESS CALENDAR: Events across the region
- INSIDE INDIANA BUSINESS column: Roche to transfer 300 jobs to Germany
Dont Need To Be A Rocket Scientist wrote on May 11, 2008 11:58 AM:
The Banks and Mortgage companies are at fault allowing this scenario to get out of hand. Homes have always been overvalued. Creative financing comes into play when the purchasing individuals can't come up with the twenty percent down. The average buyer has to come up with twenty five thousand or more for an average home that need a few thousand dollars in repairs. I often questioned who could afford those mini – mansions, maybe that is why I didn’t succeed in Real Estate. Affordable housing went out in the 1980's when the intrest rates were extremely high duh!
"