Housing woes have domino effect
— -- If you haven't yet felt the impact of the nation's credit crisis, just wait. Chances are, you won't have to wait long.
So far, the turmoil may feel a bit remote for average people: Failed mortgage lenders. Gargantuan write-downs by banks. Foreclosures for people who couldn't really afford the mortgages they got.
What about the rest of us? Are we in danger? No one knows for sure, but quite likely, yes.
As the credit crisis seeps into farther-flung corners of the economy, more of us will find it harder — and costlier — to borrow money. The value of the funds in our retirement accounts could shrink. People with subpar credit will likely find it more difficult to qualify for auto and home-equity loans. Even consumers who make the cut may need higher credit scores and more documentation.
With loans harder to get, people will hesitate to buy cars, boats and other big-ticket items. The gravest fear? That weak consumer spending — along with surging energy prices, a long housing slump and sluggish job growth — will plunge the economy into a recession.
Even if a recession doesn't occur, "We're going to be in for a rough ride," says Robert Kuttner, a senior fellow at Demos, a New York policy organization. "With job creation slowing down, credit standards being tightened and housing values not going up anymore, the consumer is under pressure to tighten his or her belt."
Becki Carr, 28, of Detroit, says she's growing gloomier about the economy. Her reasons: rising home foreclosures in Detroit, rising heating and gasoline prices and a cloud of insecurity over the area's job market. As a result, Carr says, she's watching her money more closely.
"Pretty much everyone around me is unemployed or they are having to travel down South to do contract work," she says. And "Every other house on our street is for sale, and they've been for sale for the last year and a half. … It makes me double-check my costs and things."
Tighter credit and falling home prices top the reasons why the economy could slip into a recession, according to 50 economists surveyed in late October and early November by the National Association for Business Economics.
Most economists still don't foresee a recession. But the risk of a downturn is growing with each bout of bleak news. About 18% of economists who responded to NABE's survey put the probability of a recession starting within the next 12 months at 50% or greater. That's up sharply from the 11% of economists who said so in August.
A recession would inflict pain on a majority of Americans as unemployment rose and the stock market sank further. In a recession, "Investors have to be prepared to absorb a 20%-plus decline in the value of their portfolios," says Ed Yardeni, president of Yardeni Research, an investment research firm in Great Neck, N.Y.
The benchmark Standard & Poor's 500-stock index hit an all-time high of 1565.15 on Oct. 9, but since then, it's fallen nearly 8% to 1440.70. The S&P index, which tracks large-company stocks and accounts for about 75% of the market's value, is up 1.6% for the year.
What's managed to help prop up the stock market so far is the sinking dollar, which has nourished companies that depend on foreign sales, says Gregory Peters, chief credit strategist at Morgan Stanley.
Peters says the indicator he's watching most closely, to gauge the likelihood of further economic deterioration, is the labor market. Job growth has clearly slowed but has still held up "reasonably well," he says. U.S. employers created an average 118,000 jobs in the three months through October, down from 142,000 during the first three months of 2007, the Labor Department says. The jobless rate last month was 4.7%, up slightly from the recent low of 4.5% in June but far below the 6.3% of June 2003.
