I can only speak for what I have observed on the local market, but I do believe that what I have witnessed is representative of much of the rest of the state and country. As a real estate appraiser, I had a front row seat for the bubble and burst in the real estate market.
Locally, market values began to increase late in 2004, at a rate above typical market cycles. During 2005, home prices in this part of Arizona increased approximately 50%. Heading into 2006, there continued to be some price appreciation but during the year they leveled off. The year 2007 began with fairly level prices but ended with the beginning of the burst already in the rearview mirror.
Since 2007, we have continued to experience declining market values and have not yet found the bottom. To date, it appears that the home and land prices in this area have not only lost the run-up in prices from 2004-2006, but are presently at levels of around 2000-2002, and still in a state of decline. We continue to have an over-supply of listings in almost all categories (land: vacant lots and acreage, homes: from small beginner houses to the large custom homes). Foreclosure activity is present at every level - price and size. Basic economics dictate that as long as there is an over-supply of listings, there will continue to be downward pressure on prices.
Where and when will this slide hit bottom? Under normal conditions, I believe that we already would have bottomed-out and would have begun a gradual recovery in the real estate market. We do not have "normal conditions".
We have a government that is altering just about every aspect of the process. They are offering tax credits, subsidized housing, refinance opportunities where homes are worth less than the loan balance, they are once again sponsoring loans with little to no down payment and accepting transactions where sellers pay the buyers' closing costs. The stated intention is to spur the housing market. The actual result has been a dismal failure.
We have reported unemployment around 9.5%, which represents only those filing unemployment claims, and real unemployment around 16%. We have consumer confidence at a very low level with a high degree of uncertainty as to the future economic outlook. We have national leaders intent on socializing various aspects of our economy and specific industries. The last two years of bailouts and stimulus plans, which have not worked, have the public in a state of confusion to some degree.
This negative atmosphere has dominated much of the housing market. Where there are buyers, they are expecting and receiving bargain prices. With the drastic reductions in home values, many homeowners find themselves upside-down (their home is worth less than the balance of their mortgage). Some are staying and hoping for better times ahead. Others are losing their homes. Some who are experiencing foreclosure have no options due to job loss, etc. Others have given up on a quick turnaround in values and have accepted, that financially, it does not make sense to keep making payments on a bad investment. They choose to walk-away and let the lender have the home back, even though they could continue to make the payments (this is referred to as a "strategic default").
The lenders and investors are encountering staggering losses. Many, if not almost all, properties that they take over in the foreclosure process, are being ultimately sold at a loss to the lender. It is not unusual for a REO property (real estate owned - foreclosure) to be sold by the lender for less than half of the mortgage balance.
That is the current picture of the housing crisis. This is my assessment of the situation.
In my opinion, the downward spiral in prices is self-perpetuating. Actions being taken are having the net effect of causing more actions to be taken. The banks (this will be an all-inclusive term to cover all lenders, investors and the secondary mortgage market - Fannie Mae and Freddie Mac, plus FHA and the VA) appear to be adopting a mindset of, "just deal with the loss and move the inventory". There is some pressure on the banks to sell the REO properties in their inventory in a short period of time. Holding these assets costs additional money each month. They do not see any advantage in being patient in finding a buyer as the value will be lower three months from now.
Additionally, there are numerous foreclosures needing to be moved by various banks. There are a limited number of buyers, even with historically low interest rates and bargain prices. The banks end up competing with each other for the next buyer to come along. As one bank lowers the asking price on an REO (and this is done on a routine basis - every few weeks), the other banks feel pressure to then lower their REO prices in order to compete. This creates a spiral that has resulted in prices for some properties that are lower than they have ever been in certain developments.
Investors have learned to be patient, the price will be lower, later. Banks have learned to be impatient and many are accepting very low offers. In many portions of the market, which have been heavily affected by foreclosures, lender activity is dominating the market and continues to re-establish new lows for market values. REO sales control the market in some price ranges. If a homeowner needs to sell their home, they are forced to compete with lender-owned properties. This results in non-REO homes being sold in the same price ranges as the REO homes.
Locally, the lowest priced homes appear to have decent activity. Homes that were $350,000 at the beginning of 2006, can be purchased under $200,000. Higher priced homes are rarely selling as there are a very limited number of potential buyers. As there is considerable REO activity in the higher price ranges, these REO listings are basically establishing the market. As the banks continue to drop their asking prices, the market collapses and everyone loses. Currently, there are luxury homes for sale as REO listings with asking prices less than one third of the last sale price for the home. Some vacant lots are less than one fourth of the last sale price. Still, very few takers.
The policy of a continual lowering of asking prices by the banks not only causes their losses to be larger, but also forces the taxpayers to absorb more of the losses as we continue to bail out the various players in the loan process. The competition and pressure among the banks to move inventory has established the unending, downward spiral in prices. The much lower market values, as a result of the REO activity, in turn, causes more people to be upside-down and to end up in foreclosure. The additional REO on the inventory adds more pressure to get it sold, even at more price reductions.
Currently, some of the major players in keeping the market from finding the bottom and leveling off, are the banks - some of the ones who have the most to lose. Until they decide that the prices are already too low and agree to hold steady, we will not see stability. They have the ability to help themselves and the rest of us at the same time. Will they learn patience? It truly is a virtue long forgotten in this market.
Showing posts with label Business. Show all posts
Showing posts with label Business. Show all posts
Sunday, August 15, 2010
Monday, August 2, 2010
The Inflation Bubble
Remember the good ol' days when the value of your home actually increased with the passing of time? During bad economic periods, values remained fairly stagnant. The rest of the time appreciation put added net worth in your wallet.
The normal cycles gave way to the abnormal towards the end of 2004 and lasted into 2006. During that time frame, values went ballistic. There were "bidding wars" for homes where the asking price set the low end of the bids even though it was 50% higher than the same home one year earlier. The demand for homes caused a rapid, upward spiral in prices. Once this began, we were bombarded, on almost a daily basis, with the warnings of "the bubble is going to burst!"
"The bubble", what did they mean? The bubble was the artificially high home prices which were increasing at rates around 5% per month. This was not realistic or sustainable as to the rate of increase or the level of prices. Despite the warnings, the temptation to get in the game and make quick bucks off of flipping houses was irresistible for many. The ignoring of "unrealistic" and "unsustainable" bubble warnings fueled the hot air that continued to expand the bubble.
The bubble was the appearance of substance which did not exist. It took on a life of its own but all that was under it was vapor. In 2006, the artificial expansion popped and the substance vaporized. The bubble burst, just as prophesied. Now, for approaching four years, the balloon has been flying around the room, backwards. In many areas, we have not only lost the bubble appreciation, but we have landed in a crater. At the present time, we still cannot see the bottom.
In at least America, we have another bubble. As opposed to the housing bubble, where the numbers were growing by artificial means, this new bubble is suppressing the numbers by artificial means. We have an inflation bubble.
Our government is printing extra paper money by the trillions of dollars. They are preparing to print another trillion dollars that can be thrown into the economic system. To make matters even worse, we as a country are also borrowing trillions of dollars. What is the reason we are adding so much additional cash to the economy? The cash has become the new "hot air". We have an artificially propped-up economy. The more the Feds throw cash at the recession, the worse it seems to get. So; instead of stepping back and observing that if we keep doing what we have done, we will continue to get more of the same results, only worse; they devise another program to inject more cash into the system.
The real economy remains on a slippery slope, finding itself sinking ever deeper and deeper into the abyss. But, on the surface, even though things aren't real good we expect to cycle out of this recession just as we have done so many times in the past. This notion that we are walking on solid, economical ground and that things are beginning to recover, is truly only a pin-prick away from a bursting bubble.
We cannot inject trillions of paper dollars into a struggling economy without the ultimate, resulting inflation. The more money the Feds add to the money supply, the bigger the bubble and the louder the "pop" will be down the road. Paper dollars are being used to prop up an artificial floor in order to give the appearance that the platform is the actual economic picture of the country. It is not!
Based on recent and current policy, inflation must happen. Inflation will be the result of too much cash in the money supply. Each dollar will be worth less and less, and it will take more and more of them to buy the same item. This is inflation. Things will cost more than they do right now.
I believe that inflation is inevitable at this point. The only question is how bad will it be. There are those warning of "hyper-inflation". I don't know about you, but I do not like that sound of that! Other countries have experienced hyper-inflation. The loaf of bread that used to cost two dollars now requires a stack of money. Folks, we do not want to go there!
On a national level, we have to STOP pumping dollars down a black hole. Our country has taxed and spent, borrowed and spent, and just plain spent and spent. It seems that they do not know any other solution other than let's spend some more.
If the housing bubble had burst in March of 2005, the housing crisis would be a distant memory by now. Instead, it grew substantially larger prior to it's collapse. Our inflation bubble can be dealt with now with the pain that will accompany a burst of it's size, or we can continue to inflate the bubble with more dollars and let it burst later with even more drastic results.
You could look at the housing bubble as an inflation bubble, only on the scale where one industry was affected. It took more dollars to buy the same thing of value. Now take that same example and apply it across the board, affecting our whole economy and all industry.
Personally, prepare for inflation. You might want to reconsider your investments, if you have some. It might be wise to own some thing of value rather than paper value. Become as self-sufficient as you are able to accomplish. Prepare your personal finances for harder times. Be wise in your spending and purchases.
You might be thinking, if you are still reading this, "enough with the doomsday forecasts!" I hope I am wrong and that our wise government will lead us to the land of prosperity. But, there are no signs on the horizon to cause me to believe that is the direction they are taking us. Practically every thing they are doing has the strong potential to hurt our economy.
Just remember this warning, "The bubble is going to burst!"
The normal cycles gave way to the abnormal towards the end of 2004 and lasted into 2006. During that time frame, values went ballistic. There were "bidding wars" for homes where the asking price set the low end of the bids even though it was 50% higher than the same home one year earlier. The demand for homes caused a rapid, upward spiral in prices. Once this began, we were bombarded, on almost a daily basis, with the warnings of "the bubble is going to burst!"
"The bubble", what did they mean? The bubble was the artificially high home prices which were increasing at rates around 5% per month. This was not realistic or sustainable as to the rate of increase or the level of prices. Despite the warnings, the temptation to get in the game and make quick bucks off of flipping houses was irresistible for many. The ignoring of "unrealistic" and "unsustainable" bubble warnings fueled the hot air that continued to expand the bubble.
The bubble was the appearance of substance which did not exist. It took on a life of its own but all that was under it was vapor. In 2006, the artificial expansion popped and the substance vaporized. The bubble burst, just as prophesied. Now, for approaching four years, the balloon has been flying around the room, backwards. In many areas, we have not only lost the bubble appreciation, but we have landed in a crater. At the present time, we still cannot see the bottom.
In at least America, we have another bubble. As opposed to the housing bubble, where the numbers were growing by artificial means, this new bubble is suppressing the numbers by artificial means. We have an inflation bubble.
Our government is printing extra paper money by the trillions of dollars. They are preparing to print another trillion dollars that can be thrown into the economic system. To make matters even worse, we as a country are also borrowing trillions of dollars. What is the reason we are adding so much additional cash to the economy? The cash has become the new "hot air". We have an artificially propped-up economy. The more the Feds throw cash at the recession, the worse it seems to get. So; instead of stepping back and observing that if we keep doing what we have done, we will continue to get more of the same results, only worse; they devise another program to inject more cash into the system.
The real economy remains on a slippery slope, finding itself sinking ever deeper and deeper into the abyss. But, on the surface, even though things aren't real good we expect to cycle out of this recession just as we have done so many times in the past. This notion that we are walking on solid, economical ground and that things are beginning to recover, is truly only a pin-prick away from a bursting bubble.
We cannot inject trillions of paper dollars into a struggling economy without the ultimate, resulting inflation. The more money the Feds add to the money supply, the bigger the bubble and the louder the "pop" will be down the road. Paper dollars are being used to prop up an artificial floor in order to give the appearance that the platform is the actual economic picture of the country. It is not!
Based on recent and current policy, inflation must happen. Inflation will be the result of too much cash in the money supply. Each dollar will be worth less and less, and it will take more and more of them to buy the same item. This is inflation. Things will cost more than they do right now.
I believe that inflation is inevitable at this point. The only question is how bad will it be. There are those warning of "hyper-inflation". I don't know about you, but I do not like that sound of that! Other countries have experienced hyper-inflation. The loaf of bread that used to cost two dollars now requires a stack of money. Folks, we do not want to go there!
On a national level, we have to STOP pumping dollars down a black hole. Our country has taxed and spent, borrowed and spent, and just plain spent and spent. It seems that they do not know any other solution other than let's spend some more.
If the housing bubble had burst in March of 2005, the housing crisis would be a distant memory by now. Instead, it grew substantially larger prior to it's collapse. Our inflation bubble can be dealt with now with the pain that will accompany a burst of it's size, or we can continue to inflate the bubble with more dollars and let it burst later with even more drastic results.
You could look at the housing bubble as an inflation bubble, only on the scale where one industry was affected. It took more dollars to buy the same thing of value. Now take that same example and apply it across the board, affecting our whole economy and all industry.
Personally, prepare for inflation. You might want to reconsider your investments, if you have some. It might be wise to own some thing of value rather than paper value. Become as self-sufficient as you are able to accomplish. Prepare your personal finances for harder times. Be wise in your spending and purchases.
You might be thinking, if you are still reading this, "enough with the doomsday forecasts!" I hope I am wrong and that our wise government will lead us to the land of prosperity. But, there are no signs on the horizon to cause me to believe that is the direction they are taking us. Practically every thing they are doing has the strong potential to hurt our economy.
Just remember this warning, "The bubble is going to burst!"
Sunday, October 25, 2009
Bubble, Bubble, Toil and Trouble!
Do you remember, just a few years ago, when we kept hearing the constant drumbeat of, “The housing bubble is going to burst!”? As demand for housing escalated, prices soared, causing investors to enter the picture, which caused higher demand, resulting in more price increases. As government pushed lenders to make loans to people who would normally not qualify, more demand was created and more upward pressure on prices again resulted.
This picture of the national housing situation, beginning in late 2004 and lasting into 2006, is what was referred to as the “housing bubble”. By a bubble, they were referring to home prices inflating at unsustainable rates. The chorus was loud and the warning came in the form of surround sound. Every direction you turned, someone was echoing the dire prediction of a burst to the bubble.
Well, one way or another, the prediction came true. We are still suffering the effects of the “burst”. In my area, housing prices are about at the level they were in 2004, prior to the run-up in home values. The consequences have been devastating to the national economy, state and local economies, and personal and family financial situations. Many families have lost their homes. Many have lost life savings that were invested in the homes, and the fallout is not over, yet.
The housing bubble and its eventual burst were not the only things that have led us to our present economical mess. Along the same time as the housing bubble, Wall Street experienced its own bubble and burst. Some of this was tied to the housing collapse and some was not. Some was tied to crooked companies and business leaders. Some was tied to Washington and the things they did and things they did not do. The result of the combination of these various acts was the Dow falling by around 50%. So, the people who did not have their savings tied up in their homes, but were invested in the stock market, were not exempt from the effects of a bursting bubble. Whether investments were in basic plans or in large retirement plans, such as IRA’s and 401k’s; they basically all suffered tremendous losses.
In some areas of the country, the real estate market has begun to stabilize. We have all watched the Dow climb back part of the way and even surpass the magic 10,000 level. All is well!!! We are back, baby!!!
Whoa! Hold on partner! Not so fast! Just when you thought is was safe to go back into the water, I believe I see another bubble. “What”, you ask, “are you talking about? We have not heard warnings about another bubble to watch out for?”
What caused the housing bubble? It was housing prices propped up by unrealistic, unsustainable and artificial stimulus. What burst bubble is on the horizon? It is an economic bubble, a bubble in the economy that is temporarily giving a false sense of security. You say that you have no false sense of security. What I see is an economy that is being propped up by unrealistic, unsustainable and artificial stimulus.
Our government has been busy, for the past 18 months, providing rescue packages to one company after another corporation. Why, because they were deemed to be “too big to fail.” We have been fed a constant line of pending, total, economic collapse if the government does not come to the rescue over and over again.
So what have we got for a couple trillion dollars in stimulus? We have propped up failing corporations. Many of these are still in financial trouble. We have opened the door for one business after another to come to Washington with their hands out. We have rewarded bad business policy, some criminal practices, many very bad investment decisions and reckless spending. We still have failing banks and now have a failing FDIC. Fannie Mae and Freddie Mac were taken over by the government and now FHA is looking like it will also need a bailout.
Washington keeps pumping billions into deep and dark holes, hoping that it will provide the light needed for them to see their way out of trouble. (This is if you believe that the money is actually going to save businesses. It is very possible that much of the money that we, the taxpayers, are being forced to come up with, is buying votes and allegiances from Democratic cronies so that the Democrats in power will remain there.) We had TARP (troubled asset relief program) which after being passed, had the money diverted away from actually buying troubled assets. We had the immediate crisis that gave us Stimulus 1 within the first few days of Obama’s administration. With little to show for the $780 billion dollars (plus the cost of the 9,000 earmarks added to the bill), we now hear of the need for Stimulus 2. We have the government taking over banks, left and right. Our government now owns major shares in GM and Chrysler. We have a vested interest in numerous financial institutions. They are trying to take control of our health care industry.
Still, the economy is in the tank and unemployment continues to rise each month. Thousands continue to lose their homes each month and/or face bankruptcy. We are being fed the talking points that the economy is turning around, the recession is over, it is a jobless recovery (whatever that is supposed to be), etc. To the government and media, more bad news is always “unexpected” and there is no good news.
Our frail economy and likewise the stock market, are not only vulnerable to the next “unexpected” event to take place, but are only as good as they are due to government stimulus infusions. They can only keep pumping more and more into the bubble for a limited amount of time. As weak as the bubble is, it is still an artificial bubble. It must and will pop at some point. When that happens, our fragile economy will take another major blow and collapse to some degree.
We hear that the housing market is beginning to improve – maybe the beginning of the end of their major troubles. But, I also read that the commercial real estate market is collapsing just as the residential market did. As this unfolds over the next year, more misery will hit the banks, investors and Wall Street. This is just one of the situations facing us that can trigger the bursting of the economy bubble.
Folks, we are not out of the woods, yet. This economy is on life-support. Wall Street has a pace maker with a weak battery. The banks are dropping like autumn leaves. Something, soon, will trigger the bursting of this bubble. It is inevitable because the hot air causing the bright horizon is fake. It is not dependable, lasting or sturdy. Get ready to take another hit!
Until we as a nation, businesses and individually face the music and let the “too big to fail”, fail; we will not get past these problems. Investment involves risk. We cannot continue to reward and prop up those who made horrible investment decisions. They must be left to face the consequences of their actions. If we will not allow failure, there will be no avenue for success. Investment risk must involve the chance for loss. Bankaids will only cover the sore for so long. At some point, the infection will cause permanent damage if not properly treated.
This picture of the national housing situation, beginning in late 2004 and lasting into 2006, is what was referred to as the “housing bubble”. By a bubble, they were referring to home prices inflating at unsustainable rates. The chorus was loud and the warning came in the form of surround sound. Every direction you turned, someone was echoing the dire prediction of a burst to the bubble.
Well, one way or another, the prediction came true. We are still suffering the effects of the “burst”. In my area, housing prices are about at the level they were in 2004, prior to the run-up in home values. The consequences have been devastating to the national economy, state and local economies, and personal and family financial situations. Many families have lost their homes. Many have lost life savings that were invested in the homes, and the fallout is not over, yet.
The housing bubble and its eventual burst were not the only things that have led us to our present economical mess. Along the same time as the housing bubble, Wall Street experienced its own bubble and burst. Some of this was tied to the housing collapse and some was not. Some was tied to crooked companies and business leaders. Some was tied to Washington and the things they did and things they did not do. The result of the combination of these various acts was the Dow falling by around 50%. So, the people who did not have their savings tied up in their homes, but were invested in the stock market, were not exempt from the effects of a bursting bubble. Whether investments were in basic plans or in large retirement plans, such as IRA’s and 401k’s; they basically all suffered tremendous losses.
In some areas of the country, the real estate market has begun to stabilize. We have all watched the Dow climb back part of the way and even surpass the magic 10,000 level. All is well!!! We are back, baby!!!
Whoa! Hold on partner! Not so fast! Just when you thought is was safe to go back into the water, I believe I see another bubble. “What”, you ask, “are you talking about? We have not heard warnings about another bubble to watch out for?”
What caused the housing bubble? It was housing prices propped up by unrealistic, unsustainable and artificial stimulus. What burst bubble is on the horizon? It is an economic bubble, a bubble in the economy that is temporarily giving a false sense of security. You say that you have no false sense of security. What I see is an economy that is being propped up by unrealistic, unsustainable and artificial stimulus.
Our government has been busy, for the past 18 months, providing rescue packages to one company after another corporation. Why, because they were deemed to be “too big to fail.” We have been fed a constant line of pending, total, economic collapse if the government does not come to the rescue over and over again.
So what have we got for a couple trillion dollars in stimulus? We have propped up failing corporations. Many of these are still in financial trouble. We have opened the door for one business after another to come to Washington with their hands out. We have rewarded bad business policy, some criminal practices, many very bad investment decisions and reckless spending. We still have failing banks and now have a failing FDIC. Fannie Mae and Freddie Mac were taken over by the government and now FHA is looking like it will also need a bailout.
Washington keeps pumping billions into deep and dark holes, hoping that it will provide the light needed for them to see their way out of trouble. (This is if you believe that the money is actually going to save businesses. It is very possible that much of the money that we, the taxpayers, are being forced to come up with, is buying votes and allegiances from Democratic cronies so that the Democrats in power will remain there.) We had TARP (troubled asset relief program) which after being passed, had the money diverted away from actually buying troubled assets. We had the immediate crisis that gave us Stimulus 1 within the first few days of Obama’s administration. With little to show for the $780 billion dollars (plus the cost of the 9,000 earmarks added to the bill), we now hear of the need for Stimulus 2. We have the government taking over banks, left and right. Our government now owns major shares in GM and Chrysler. We have a vested interest in numerous financial institutions. They are trying to take control of our health care industry.
Still, the economy is in the tank and unemployment continues to rise each month. Thousands continue to lose their homes each month and/or face bankruptcy. We are being fed the talking points that the economy is turning around, the recession is over, it is a jobless recovery (whatever that is supposed to be), etc. To the government and media, more bad news is always “unexpected” and there is no good news.
Our frail economy and likewise the stock market, are not only vulnerable to the next “unexpected” event to take place, but are only as good as they are due to government stimulus infusions. They can only keep pumping more and more into the bubble for a limited amount of time. As weak as the bubble is, it is still an artificial bubble. It must and will pop at some point. When that happens, our fragile economy will take another major blow and collapse to some degree.
We hear that the housing market is beginning to improve – maybe the beginning of the end of their major troubles. But, I also read that the commercial real estate market is collapsing just as the residential market did. As this unfolds over the next year, more misery will hit the banks, investors and Wall Street. This is just one of the situations facing us that can trigger the bursting of the economy bubble.
Folks, we are not out of the woods, yet. This economy is on life-support. Wall Street has a pace maker with a weak battery. The banks are dropping like autumn leaves. Something, soon, will trigger the bursting of this bubble. It is inevitable because the hot air causing the bright horizon is fake. It is not dependable, lasting or sturdy. Get ready to take another hit!
Until we as a nation, businesses and individually face the music and let the “too big to fail”, fail; we will not get past these problems. Investment involves risk. We cannot continue to reward and prop up those who made horrible investment decisions. They must be left to face the consequences of their actions. If we will not allow failure, there will be no avenue for success. Investment risk must involve the chance for loss. Bankaids will only cover the sore for so long. At some point, the infection will cause permanent damage if not properly treated.
Monday, October 12, 2009
Economic Good News
Even though this statement, heard today on the radio, was about Arizona; I am sure the rest of you will recognize that it also applies to the local economy where you live.
The good news, according to this lady: "We are getting bad, not as fast."
Now I feel better!
The good news, according to this lady: "We are getting bad, not as fast."
Now I feel better!
Sunday, June 28, 2009
Hard Times
We all find ourselves in the midst of some fairly hard economic times in the USA. For many of us, it is a time to "tighten the belt", so to speak. If you are renting, it may be harder to buy a home. If you own, it may be harder to make the payment each month.
The other day, I ran across a slogan that I am told was popular during WWII. During that period of our history, the population was required to do with less and sacrifice for the good of the country and to help the military have what it needed. The saying, "Use it up, wear it out, make it do, or do without!"
Maybe each of us can find something in those phrases that help ease the situation.
The other day, I ran across a slogan that I am told was popular during WWII. During that period of our history, the population was required to do with less and sacrifice for the good of the country and to help the military have what it needed. The saying, "Use it up, wear it out, make it do, or do without!"
Maybe each of us can find something in those phrases that help ease the situation.
Saturday, March 7, 2009
Econ 101
The current situation with the economy in our country demands that we, as the citizens and voters, have a basic understanding of Economics. We need to understand some of the financial ramifications of government interference in private business and over-control of the banking industry.
Supply and Demand are some of the basic concepts upon which our economy functions. They are not theories. They are as relevant as the Law of Gravity. This inter-working of S&D affects each of us on a daily basis. In an open market economy, one where the principles of S&D are free to adjust in relation to each other, with a little time, they tend to balance out to a healthy level. When they are artificially managed or controlled, the imbalance cannot correct itself and other factors, such as price, are affected. Many times these results become unintended consequences of the artificial controls imposed.
Our market economy is based on S&D. When there is demand, it becomes profitable for someone to meet that demand by adding to the supply. Strong demand with low supply causes rising prices. When demand slows down, an over-supply will result in lower prices. When the two are in balance, prices stabilize.
Demand cannot be controlled in the same way that supply can be manipulated. With limited supply, caused by artificial controls, prices will increase because demand is still present. This will continue, to a point where the much higher prices finally cause demand to subside. Those with demand will seek other areas with more affordable supply and the area with controls will suffer a loss of market activity and a reduction in the infusion of funds.
S&D function in all aspects of our economy. They are the main factors that determine price in raw materials, labor, land, housing, food, oil, education, interest rates, investments and etc. When allowed to fluctuate freely, shortages are made up by higher production or the infusion of more labor, money or materials. Over-supply causes money to be spent elsewhere, labor to relocate and factories to make other products or close down. A good example of S&D being manipulated by controlling supply is the recent price increases experienced by all of us at the gas pumps. OPEC artificially limited supply and drove oil prices higher. With the higher prices, demand decreased, prices began to stabilize allowing the supply to grow and lower prices were the result. The Federal Reserve Board artificially controls some aspects of money supply, driving up the cost of money due to continued demand. The result is a more expensive cost of borrowing, which transfers into many goods and services being more expensive. When they lower interest rates, it is to stimulate demand and hopefully the national economy.
The local real estate market experienced a shortage of supply of residential listings in 2005. The shortage was caused by very strong demand. The demand was caused by low interest rates and a very strong national economy. While supply was catching up to demand, prices rose sharply. The developers and contractors in the area were the vehicles that stepped up to attempt to add to the supply to meet the strong demand. If they had not done so, we would have experienced even higher prices and housing that was less affordable.
In 2006, the demand for housing began to slow. Prices became more stable and supply was given an opportunity to catch up with the demand. During 2006, the real estate market in Payson and the surrounding area returned to a more normal level. Prices were more stable and the supply of listings steadily grew. While home prices rose by 50%, in some cases, over a short period of time; wages did not correspond by the same increases. This left some to struggle with the cost of entry housing. As stated above, with some time and patience, a free market economy will reach a balance. As workers find they can no longer afford to live in the area, businesses will realize they must raise wages in order to attract the needed labor. With a passage of time, a new balance will be reached between income and cost. The higher cost of labor will result in a higher price for the product, which will be absorbed by the market if there is sufficient demand for the product. If there is not sufficient demand in the market to accept higher prices, this indicates the added supply being produced by the added labor is unnecessary. At this point the employer should scale back production to the level where the price can remain steady and the cost of required labor is affordable. All of these will balance themselves out in a free market economy.
When the free market is interfered with, the laws of supply and demand cease to function in a normal way and balance does not happen. Currently, we are seeing the result of the government messing with the lending process, banking industry and other aspects of the housing industry. We are seeing the results of government passing regulations that have hurt the auto industry.
Big government is not the answer to solving the current economic crisis. The best thing that could happen, in the long run, would be for the government to reverse much of what they have been passing, step back from trying to manage industry and control business, and let a free market begin to function. There will be short term pain, but long term gain. Right now, government is trying to avoid the unintended consequences of their prior actions. We would not be here if they had stayed out of the way in the first place. The same people who broke the system are now in charge of fixing it. They either do not understand what they are doing, or are doing it on purpose. Why would the do that? Power, control and money! It is not about fixing the problem, for them, it is about increasing their power and control over all of us and the money that comes along with being in that position.
Supply and Demand are some of the basic concepts upon which our economy functions. They are not theories. They are as relevant as the Law of Gravity. This inter-working of S&D affects each of us on a daily basis. In an open market economy, one where the principles of S&D are free to adjust in relation to each other, with a little time, they tend to balance out to a healthy level. When they are artificially managed or controlled, the imbalance cannot correct itself and other factors, such as price, are affected. Many times these results become unintended consequences of the artificial controls imposed.
Our market economy is based on S&D. When there is demand, it becomes profitable for someone to meet that demand by adding to the supply. Strong demand with low supply causes rising prices. When demand slows down, an over-supply will result in lower prices. When the two are in balance, prices stabilize.
Demand cannot be controlled in the same way that supply can be manipulated. With limited supply, caused by artificial controls, prices will increase because demand is still present. This will continue, to a point where the much higher prices finally cause demand to subside. Those with demand will seek other areas with more affordable supply and the area with controls will suffer a loss of market activity and a reduction in the infusion of funds.
S&D function in all aspects of our economy. They are the main factors that determine price in raw materials, labor, land, housing, food, oil, education, interest rates, investments and etc. When allowed to fluctuate freely, shortages are made up by higher production or the infusion of more labor, money or materials. Over-supply causes money to be spent elsewhere, labor to relocate and factories to make other products or close down. A good example of S&D being manipulated by controlling supply is the recent price increases experienced by all of us at the gas pumps. OPEC artificially limited supply and drove oil prices higher. With the higher prices, demand decreased, prices began to stabilize allowing the supply to grow and lower prices were the result. The Federal Reserve Board artificially controls some aspects of money supply, driving up the cost of money due to continued demand. The result is a more expensive cost of borrowing, which transfers into many goods and services being more expensive. When they lower interest rates, it is to stimulate demand and hopefully the national economy.
The local real estate market experienced a shortage of supply of residential listings in 2005. The shortage was caused by very strong demand. The demand was caused by low interest rates and a very strong national economy. While supply was catching up to demand, prices rose sharply. The developers and contractors in the area were the vehicles that stepped up to attempt to add to the supply to meet the strong demand. If they had not done so, we would have experienced even higher prices and housing that was less affordable.
In 2006, the demand for housing began to slow. Prices became more stable and supply was given an opportunity to catch up with the demand. During 2006, the real estate market in Payson and the surrounding area returned to a more normal level. Prices were more stable and the supply of listings steadily grew. While home prices rose by 50%, in some cases, over a short period of time; wages did not correspond by the same increases. This left some to struggle with the cost of entry housing. As stated above, with some time and patience, a free market economy will reach a balance. As workers find they can no longer afford to live in the area, businesses will realize they must raise wages in order to attract the needed labor. With a passage of time, a new balance will be reached between income and cost. The higher cost of labor will result in a higher price for the product, which will be absorbed by the market if there is sufficient demand for the product. If there is not sufficient demand in the market to accept higher prices, this indicates the added supply being produced by the added labor is unnecessary. At this point the employer should scale back production to the level where the price can remain steady and the cost of required labor is affordable. All of these will balance themselves out in a free market economy.
When the free market is interfered with, the laws of supply and demand cease to function in a normal way and balance does not happen. Currently, we are seeing the result of the government messing with the lending process, banking industry and other aspects of the housing industry. We are seeing the results of government passing regulations that have hurt the auto industry.
Big government is not the answer to solving the current economic crisis. The best thing that could happen, in the long run, would be for the government to reverse much of what they have been passing, step back from trying to manage industry and control business, and let a free market begin to function. There will be short term pain, but long term gain. Right now, government is trying to avoid the unintended consequences of their prior actions. We would not be here if they had stayed out of the way in the first place. The same people who broke the system are now in charge of fixing it. They either do not understand what they are doing, or are doing it on purpose. Why would the do that? Power, control and money! It is not about fixing the problem, for them, it is about increasing their power and control over all of us and the money that comes along with being in that position.
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