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Open Question: Recession 2007 ???
I have written about the great imbalances of the US economy. Yet in all of my previous articles on the subject I have been unable to pinpoint when these imbalances will result in a bust.

One can never be completely sure of the future, of course, as one does not have full information about all factors shaping future events. Thus, it is possible that this prediction will go wrong if the US experiences some future positive shock, such as for example a significant decline in oil prices. Australia seemed poised for a recession in 2005 after its housing market busted, but this was averted as the prices of Australia’s commodity exports soared because of increased demand from China.

However, barring such an unexpected positive shock, it seems increasingly clear that we will see a US recession this year. The main reason for this is that the housing bubble that fueled the recovery of the last few years has essentially burst.

While mortgage debt continues to climb, albeit at a slower rate than before, and while housing prices have flattened rather than declined so far, other housing market indicators point to a housing recession. New home sales have reached multi-year lows and the inventory of unsold homes reached multi-year highs. Meanwhile, residential investment has declined significantly from its peak in late 2005. From 6.3% of GDP in the third quarter of 2005 to 5.3% in the fourth quarter of 2006. However, that is still above the 4% average of the 1980s and 1990s, and also significantly above the 3.33.4% level of the recessions of 1982 and 1991.1
So far, the economy has seemingly handled this fairly well and experienced what one might call a “soft landing,” with growth being slow but still well above zero. Yet there are increasing signs that the worst is yet to come. Much of the housing bubble was financed by so-called subprime mortgages, mortgages to people with a low credit rating. Subprime mortgages were encouraged greatly by the government, with the Federal Reserve providing a cheap source of credit and with Bush encouraging it as part of the “ownership society” that he envisioned. But after the Fed was forced to raise interest rates again, and as the introductory teaser offers expired, the cost of borrowing for the subprime borrowers increased sharply. And as subprime lenders almost by definition have weak personal finances, many have proven unable to handle that.
And so we now see how the default rate has increased sharply. This will mean two things: first, new subprime loans will decline sharply. So far this year, subprime loans have declined 37% from last year.2
This will not only mean lower demand for new houses, but also increased supply as an increasing number of subprime borrowers are forced to leave their homes. This fact, as well as the fact that construction spending is still at historically high levels means that it is likely to decline a lot more. And if this causes outright decline in housing prices, it will have a very adverse effect on consumer spending. The household savings rate was -1.2% in January and February.3 Meanwhile, despite record high asset valuation, the household debt to asset ratio reached record levels last year, as did the mortgage debt to housing value which hit a record high of 47% in the fourth quarter of 2006.4 Looking beyond the aggregate number, you can see that 27% of all homeowners have less than 20% equity (more than 80% mortgage debt) in their homes and 16% have less than 10% equity, making them highly vulnerable to a fall in prices.5
All of this implies that the current spending pattern is dependent upon a continued rapid increase in asset prices, from levels which are historically already extremely high. Household real estate values, which in my first article on the subject I reported to be 184% of disposable income, up from the historic range of 135% to 150%, had in the fourth quarter of 2006 risen to 213% of disposable income. Meaning that there is certainly a high risk of falling prices which, given the negative savings rate and the record high level of household debt, would imply that consumer spending will have to fall.
With residential investments likely to continue to fall and with consumer spending likely to be weak as well, the one thing that could save the US economy would be business investments. Business investments are still at a relatively moderate level, and in relation to corporate profits they are in fact historically low.
However, there are signs that corporate profits have peaked. The increase in profits over the latest year has been concentrated in the financial sector and in foreign subsidiaries of US firms. In contrast, profits at domestic non-financial industries (the sector that invests) have started to decline: in seasonally adjusted terms, they were 2.5% lower in the fourth quarter of 2006 than in the first quarter.6 And with profits showing signs of declining, it is perhaps less important that they are still at high levels in absolute terms, because what matters for business leaders is not so much current profits, but expected future profits or to be more precise, if businesses think additional investments will generate even higher profits.

And with the pessimism generated by the decline in profits and the trouble in the housing market, an increasing number of business leaders seem to think that the days of high profits will be over soon. Business investments fell during the fourth quarter of 2006, and judging by the weak data for non-defense, non-aircraft durable goods orders,7 the outlook for 2007 is not particularly good.

But what about the Federal Reserve? The Fed has always been “the knight in shining armor” always saving the day by cutting interest rates and they will do so again. At least, that’s what many people on Wall Street seem to think. And of course, Ben Bernanke would certainly be willing to provide “liquidity” with or without helicopters if he thought a recession was coming.

However, the fact that commodity prices continue to soar and the dollar is falling means that Bernanke will have limited scope to cut interest rates, particularly in the aggressive way that Greenspan did after the tech stock bubble burst. With businesses being reluctant to invest, and with subprime mortgages discredited, one has to wonder: where is Bernanke going to create the next bubble, the one that will mask the hangover from the housing bubble in the same way that the housing bubble masked the hangover from the tech stock bubble?

Resolved Question: where can i get appoved for a mortgage with bad credit?
i have a very low credit score , but need to buy a home can someon please give me advise?

Resolved Question: Am I stupid…buying a house with bad credit question.?
I have been living in a house..lease purchase option for two years. I officially have 11000 down due to part of my rent going toward purchase. problem is..i havent been able to increase my credit score. I finally found someone to give me the load but heres the stipulation……
-house appraised for 181000.00
-with my down payment and owners paying closing costs my loan would only be for 153000.00
-9% interest
-adjustable mortgage rate
I searched and searched and that is the only place that will give me a loan with my 550 credit score. I have to buy this month or move.
Am i stupid for agreeing to such high interest and an AMR or would i be stupid for passing up a house that appraised for 181 and only getting loan for 153???

Employment - Loss of Statutory Rights - Compensation<
> Starting a New Career

Starting a new career can be a daunting venture, especially when you have acquired a lifetime’s worth of financial responsibilities and obligations. Nothing, however, is impossible, no matter how strapped for time and money you are currently. All it takes is a well thought out plan and diligence and you can soon be starting a new career.

First, think very seriously about what you want to do. Why have you chosen this new career? Is it completely different from what you are doing now? Are there aspects of your current job that apply to your new career as far as contacts, experience, or education? Does this new career require learning a whole new skill set and industry or is it a matter of upgrading your education to the next level? Make a list of all the assets you already possess that you can bring to a new career. Include personal skills and qualifications as well as natural instincts and inclinations. Some things can’t be taught and if you have a natural predilection for the skills needed for your new career, this may take you further than you think.

Next, determine the steps you will need to take in order to arrive at a position in your new career. To help you do this, talk to people currently working the job you have chosen. How did they get where they are? Would they have done anything differently? Do they have any recommendations? Do you need a degree? Online classes and schools are all over the internet and will allow you to study while keeping your job. Do you need an apprenticeship to establish yourself? Try and find one that pays you. Even a small stipend can help you offset financial costs at home.

With planning and patience, you can start a new career without putting your current home situation at risk. Take one step at a time and allow yourself as long as it takes to complete it before going on to the next one. Your new career isn’t going to disappear while you spend time properly preparing for it.

The recent case of Corbett v Superdrug Stores Plc 2006, addressed how to calculate the award for an employment dispute. The employee had been working for the employer for more than 10 years when she was unfairly dismissed. She brought her case before the Employment Tribunal and was awarded the sum of ?1,420 for loss of her statutory rights. However, the Tribunal neglected to give an explanation as to why that figure was reached.

The main problem was that it was not made clear how that figure was reached. There were three potential reasons why the Tribunal awarded her that amount:

* It was compensation for the loss of protection against unfair dismissal which it would have taken the employee until 17 May 2006 to acquire; or

* It was compensation for the loss of the right to long notice which she had built up with the employer and did not receive; or

* Both.

The employer appealed against the amount awarded to the Employment Appeals Tribunal (?EAT?). (more…)

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