The Economic Trickle Down Effect

by |

The current state of the real estate market has far reaching effects. A homeowner with an adjustable rate mortgage sees his payment go up several hundred dollars but he tightens his belt and is still able to make the payments. He cuts out as much discretionary spending as possible, he doesn’t eat out as often, goes out to see fewer movies, skips that weekend trip to the ski resort, doesn’t buy the big screen TV that he wants for watching football games, decides to put off buying that new car he’s had his eye on for a while longer and so on down the line. It’s not that his mortgage payment rising a few hundred dollars stopped him from doing all of that, it was the fact that he wasn’t feeling as prosperous as he was before. He now has a concern for his financial future and decides to cut back now because things are probably going to get worse. He is feeling pretty smart about his decision, he’ll just wait out the current situation. Many others do the same either because their higher mortgage payments took away what little extra money they did have, or worse, they’re faced with the prospect of losing their home altogether.

But what about the car salesman who now sells one less car or the waiter who earns fewer tips and the restaurant owner who sells fewer meals? An electronic salesman sees his commission check lowered and has less money to spend on the things he needs and wants and the ski resort is faced with fewer vacationers and may need to lay people off. The ripples go through the entire economy and are felt by everyone. We tend to think of the soft real estate market as only affecting people in the industry. It is true that the real estate agent doesn’t earn commissions if houses don’t sell and mortgage brokers who can’t fund loans don’t earn their fees. But it is the people that they do business with who suffer as well even though they may have nothing to do with the real estate industry themselves.

An economy is nothing more than money in motion. John the consumer buys from consumer Jane who spends her money at consumer Tom’s shop and the money keeps moving. When John doesn’t buy Jane can’t buy and Tom doesn’t have enough money to pay his bills. The money has stopped flowing and the economy goes into a recession. There is a snowball effect in that consumers who are feeling the pinch suffer a drop in confidence and reduce their spending even further and the downward spiral continues.

The Federal Government is well aware of the impact that consumer confidence has on the economy and make efforts to track how consumers are feeling, that is called the Consumer Confidence Index. The Federal Reserve Board will do things to stimulate the economy and keep the money in motion. They pump billions of dollars into the financial markets to improve liquidity and change the Federal Funds Rate and Discount Rate to directly affect the rates that consumers pay on loans. Some of these actions are taken for the psychological impact that they will have. The recent mortgage crisis has compelled the Federal Reserve Board to lower rates even though they will not directly effect mortgage rates. The psychological impact, however, is that the government is doing something to help the situation. The rate cuts have other consequences as well, they open the door to greater inflation and they directly affect the value of the dollar in relation to other currencies.

The bottom line is that our economy is cyclical and will always have its’ ups and downs. At some point things will hit bottom and start to rebound as they always have before. Consumer confidence will start rising and people will start spending. Money will flow at a greater rate and the economy will expand again. If you wait for this to happen before you begin investing you will most likely miss the early stages of the next cycle because by the time you realize what is happening the opportunity has passed you by.

The time to buy any investment, including real estate, is when everyone else is selling. There are bargains to be had and money to be made. The smart money buys too soon and sells before the peak, the dumb money follows the crowd and often misses out.

The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty.
Winston Churchill

About Author

Leave A Reply

Pair a profile with your post!

Create a Free Account


Log In Here