Tuesday, September 04, 2007

How the Economy Can Grow While the Housing Market Crashes

There are two ways to go about cutting back on your gasoline consumption.

The cool way and the nerdy way.

The cool way is to get yourself a motorcycle. Gets great gas mileage (mine gets between 45-52 MPG last I measured), chicks dig it, and you cannot help but look cool on it.

The nerdy way is to get a hybrid. That just screams "pansy." And your mileage isn't even that much better. Reports show a little bit more around the mid 30's in MPG. And no chicks, except them kind of gray haired, aging hippie chicks with no make up who aren't interested in you as much as they are the environment.

Regardless, the drawback to the motorcycle (aside from if you wipe out your either dead or paralyzed) is that you can't listen to talk radio. Oh, I know, I'm sure there's a way, but on my motorcycle I can't, no radio. So it leaves me with a lot of thinking time on the highway as I do more than most environmentalists to cut back on my gas consumption.

The cool thing about this is that when you are working, you are not usually thinking. You are carrying out tasks. Not pondering or scheming a way to come up with a better mouse trap. Thus, this is why the majority of great ideas happen while driving on the interstate, sitting on the toilet, or laying about doing nothing in particular, which is what happened to me yesterday.

I finally figured out why the economy may be growing so great, while the housing market plummets. I was of the opinion that a recession MUST occur at some point in time or another, but now I'm not so sure. The reason why is that while the housing bubble and subsequent crash may even rival that of Dotcom Mania, it really may not have that much of an effect on the larger economy since housing for most people is an expense.

Most of us look at dropping housing prices as a bad thing as the value of our largest asset, our house drops. However, unless you're planning on selling it, its value is largely irrelevant since it is the cash flows associated with the mortgage that you have to pay that matter.

Even if you don't own housing, but rent, the same thing applies. Such a glut in the market in both single family and multi-family means there's a glut of housing no matter if your own or rent. If you own or are looking to own, your options for housing and its affordability have never been better. If you rent, you're able to negotiate landlords down and get discounts lowering your rent expense.

The ultimate end result is that people's largest single expenditure, housing, has decreased, leaving more disposable income in their pocketbooks. This in part may explain why the economy grew at 4%, consumer spending remains healthy and why consumer confidence remains high as well.

Alas, it may just be the banks, mortgage companies and real estate developers that pay in the end...exactly those who deserve to pay.

13 comments:

Anonymous said...

"Alas, it may just be the banks, mortgage companies and real estate developers that pay in the end...exactly those who deserve to pay." - Ahh that warms the heart :)

Another way to get around looking like a pansy is to get one of those 50 or 100cc motor scooters :) No offence to motor scooter owners, i wouldn't actually mind one myself :)

But as far as expense goes, are bikes really that cheap anyway? When you take into account that insurance is more expensive, servicing is expensive, replacing the tires is more frequent and more expensive (i think?). I'm sure it's still cheaper than a car though...

Marty said...

Your explanation fails to account for why other housing market busts produced recessions. In theory the same thing should happen, people would have their housing prices (rents and whatnot) reduced while those who owned their homes could just wait for the market to return.

Captain Capitalism said...

Hey Frank,

Hope the married life is going well. Actually the insurance is absolutely cheap. You assume I'm buying brand new and insuring the vehicle. I'm just insuring liability. I bought a motorcycle that is probably older than you are. It costs me $80 US dollars per year to insure. Just buy yourself a scooter, they're fun as hell. Give my sincere best to your wife. After marrying you, she'll need it! ;P

Marty,

You're right, history is on your side. I'm just making an observation about why there hasn't been a recession yet. There SHOULD be one, I agree. But I've been befuddled as to why there hasn't been one. And this latest economic report about 4% growth really perturbed me. I was expecting nothing.

Because we are so wrong, it means we have to rethink our philosophies or theories about the economy.

Economics is like women my Latin friend. You cannot question, you have to accept.

Anonymous said...

"I'm just insuring liability" - yeah fair point...

Although i dunno how good a 30+ year old motorbike would perform :)

When we were in Koh Tao for our honeymoon, we rented a motor scooter and that was loads of fun - cheap too - 200THB (which is under AUD6.00) a day. But with the two of us on it, it almost didn't make it up a few hills - You'd have to take a run up :)


Married life is good - no different really than living in sin, which we were doing for about 3 years or so :)

Captain Capitalism said...

You shall burn, sir. You shall burn.

Do the Aussies have anything like we do here in regards to mega churches and star preachers?

Unknown said...

I have a Toyota Matrix. Great room inside for camping and the dog. and awesome gas mileage.

Able Archer said...

Sorry Captain, your analysis is way off. The problem with asset prices falling, even if you assume that people will hold on to them forever, is that it significantly reduces their capability to borrow money, since they have less collateral in the eyes of the banks.

This gradually decreases the overnight money supply (as more people pay back their loans rather than take on bigger loans). With less money in circulation, you get less inflation and less demand for goods and services. And sometimes you also get a recession.

Captain Capitalism said...

I've seen those Matrixes, but are they hybrids?

Captain Capitalism said...

I subscribe to being more of a monetarist, the level of money is irrelevant, it's how much we produce. Though you are correct in that consumer spending was in part fueled by debt, and that if you can't get your HELOC to buy that new SUV, then this may throw us into a recession.

Anonymous said...

IMO the best set-up is to work on your own from your home....

@$2.00 / minute!

Very little overhead.

Substantial tax deductions.

No rush hour traffic UNLESS paid for @ $2.00 per minute.

You call the shots for appointments, at least within reason.

And you get to pick your clients.

Life is beautiful, especially with an understanding wife and no mortgage or loan payments.

It took some planning and prioritizing to get the offsprings through university and college but it was worth it.

'appy as a lark

Anonymous said...

"Do the Aussies have anything like we do here in regards to mega churches and star preachers?"

Probably, but from what I know, no one really hears about them - they don't get nearly as much attention as what your loony religious types do. We can hear them screaming all the way from down under :)

Anonymous said...

It's not like banks wouldn't do anything with the money they would have been getting from higher housing payments.

Consumers with more cash means banks with less. That means more consumer spending than savings, since banks invest more than consumers do.

Lots of consumer spending and not much investment is good for short term growth, but bad for long term growth.

Johnny Roosh said...

Interesting theory, that is that the costs of housing going down frees up cashflow for consumers to consume.

The only problem with that theory is that you are making the assumption that people can effect a transaction to get from their current cashflow to a new lower one.

A renter can do this by moving. A homeowner however can only do this by selling and then buying or otherwise refinancing, but neither of these are happening right now.

The mortgage refi business is all but stopped in its tracks and homesales are at a five or six-year low.

...not that I have a better theory other than to point out the obvious which is that our economy is getting more and more complex and globalized.