Our Callous Economy

News about increasing foreclosures may not be as bad as you think because weakness in the housing sector isn't enough to materially hamper America's economy.

What is wrong with our economy? Clearly, it's not been reading the news and doesn't understand it's supposed to be tanking. How frustrating—particularly since it appears new mortgage foreclosures have set a new record:

New Mortgage Foreclosures Set Record
By Martin Crutsinger, Washington Post

Seems bad, except according to the Mortgage Banking Association, if not for California, Florida, Nevada, and Arizona, we'd be seeing a nationwide drop in the foreclosure rate. Thirty four states saw foreclosure rate decreases and the remaining states, besides the aforementioned four, saw only modest increases. What's more, we learn in The Washing Post article "problems in the formerly red-hot housing markets of California, Florida, Nevada and Arizona reflected in part speculators walking away from mortgages they can no longer afford." Speculators. As in "folks who intentionally take on additional risk for a quick profit" as opposed to "normal homeowners who buy a house and intend to live in it for five years or so."

So how is the economy reacting to this news?

Economy Suffered Little in August
By Neil Irwin and Tomoeh Murakami Tse, The Washington Post

Not much at all. Does the economy just not care? According to the Fed's report, "Outside of real estate, reports that the turmoil in financial markets had affected economic activity during the survey period were limited." What's worse, GDP growth for Q2 got revised up to 4.1%. It's almost like subprime woes are too small to have much of a lasting impact on our dynamic economy.

Yet, the news about subprime is bad and housing prices continue to sink or at least stagnate nationwide. That has to be bad, right? How on earth can our economy keep growing when the media solemnly informs us each day that we're all irrevocably doomed?

Retailers Score High Grades on August Sales
By Parija B. Kavilanz,

Being told we're doomed may make us sad, but apparently we're shopping our sorrows away. How can we do that? Aren't we all swimming in debt and soon to be unemployed?

U.S. Service Economy Holds up Growth Pace
By the Associated Press,

No doubt, some mortgage specialists employed by niche subprime lenders might be spending September updating their resumes, but in general, the rest of the economy is pretty darn healthy. Example: The service sector grew at a healthy pace and beat expectations for August. But how much does the service sector really impact our overall economy? Quite a bit, because "the service sector accounts for 80 percent of U.S. economic activity."

While it's true foreclosures are up, in aggregate homeowners are doing fine—unemployment is very low, incomes are growing, and inflation is contained. And because interest rates have been historically low over the past few years, we're seeing record levels of homeownership despite the foreclosures. In our view, more people owning homes is good. Our politicians want to "fix" this problem with greater regulation aimed at limiting access to credit for those with lower incomes or sub-optimal credit ratings. This seems a bit mean (besides uncapitalistic and possibly unconstitutional) to us, but perhaps you have to be a politician to see the benefit.

No matter what the media howls, economic fundamentals are strong right now—the economy and earnings are growing globally and interest rates remain benign. Economic negatives, such as weakness in the housing sector, have been so heavily covered for so long that there's simply no power left to move the market much.

And maybe, just maybe, the media has this housing bubble thing wrong.

American Heartland Escapes the Housing Bust
By Jason Beaubien,

We're not saying just because the media largely agrees on something it's not true, but real estate prices have historically been impacted much more by regional pressures than national trends. Who knows? Maybe the next hot place to buy condos will be Sioux Falls. South Dakota or bust!

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.