Does the subprime meltdown indicate something bad for the economy?

Boy, oh boy, has the subprime market’s crash been making the news. I guess everyone loves a disaster movie, right?

But, a more important question to ponder is how the subprime meltdown may impact the broader economy. Some very smart people believe it’ll lead to the next recession. People like Merrill Lynch’s David Rosenberg and commodities investing great Jim Rodgers have made their predictions known.

I’d be a fool if I said I knew the answer, but I certainly have some thoughts of my own (you know what they say about opinions). I think a lot of the economy’s growth over the last 4 years has been due to the housing market. For example, much of the growth in jobs during this expansion has been due to housing (home building, mortgage finance, real estate brokers). And, mortgage equity withdrawals have certainly been fueling consumer expenditures.

So, if the a good chunk of the economy’s growth has been due to the housing market, what would happen if a few subprime loans defaulted? Those houses would come back on the market, and the bankers who ended up with them would be eager sellers. This could lower home prices at the margin. And, more homes on the market could lead to less home building. How might this impact all the jobs created over the last 4 years in home building, mortgage finance and real estate brokerage? Not for the better.

My fear is that this dynamic feeds on itself. More laid off builders, brokers and mortgage writers could lead to more defaults. Such defaults could lead to greater inventories, lower home prices, and more laid off workers related to the housing industry. Perhaps you can see the same spiral I do.

Added to this, Congress is worried that lenders have been taking advantage of consumers. Action on their part may restrict the mortgage market even further. This could be bad news, too, because folks with adjustable rate mortgages may need to refinance exactly when Congress restricts that market, further exacerbating the problem.

Betting against the US consumer any time since the depression has looked dumb, so I hesitate to spell out this worst case scenario. But, my fear about housing is exactly what kept me out of housing related investments even as they shot the lights out over the last 4 years.

People investing in the housing market now will end up looking brilliant if things don’t fall apart. But, because it’s almost impossible to forecast how bad things may get, I’ll wonder…were they lucky, or good.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.