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Today I am going to be blogging about something that is more than just the real estate market, it is the economy and what we may be doing to make things worse!
The American Economy is a very fragile infrastructure that rests on the simplest of concepts... CONSUMER CONFIDENCE. What is CONSUMER CONFIDENCE? It is a string of emotions that leads into a cause and effect. CONSUMER CONFIDENCE is knowing that you are going to have a job the next day so there for you will spend your last $20 on milk and eggs.
The problem with the economy today is not that we are uncontrollably plummeting into a recession or a depression, it is the fact that we are scared that our economy is failing and therefore we are creating our own destiny.
Joe Guy goes home to his family after a long days work and says to his wife, "I heard that the economy is not doing so well and business is going to get tight." Now Joe is no longer a CONFIDENT CONSUMER, and neither is his wife. So the next day while Joe goes to work and tells his buddies what he heard, his wife stays home and makes some cut backs. Today she didn't go to the grocery store or the salon and she lowered their DirecTv package. Joe's buddies at work tell their wives who do the same and the wives tell their friends and family members. Thus resulting in wide spread worry which strips the community of CONFIDENCE. These small cut backs are going to have a massive ripple effect on the community. Suddenly the wives aren't shopping at the grocery store as frequently, so the store is not making the same amount of money and assesses that it no longer needs all of the employees and lays off people. The grocery store employee happens to be Joe Guy's friend and once he is laid off Joe's fears have been confirmed. CONSUMER CONFIDENCE LOWERS. Joe's company see that the community is doing some layoffs and decides that they better start worrying about their business also, Joe's company supplies food the the grocery store which is no longer ordering the same amount of food... so the company does not need as many employees as they used to. Joe ends up with out a job. His wife buys even less food on government assistance and the grocery store lowers supply request even more and Joe's former company does more layoffs.
So what does this mean for the bank? Joe used to deposit his paychecks into the bank and Joe's company used to deposit their payrolls and their income. Joe is no longer putting money in the bank and the company is now depositing less and less money. Now the bank is in trouble. Without deposits the bank can not meet their cash reserves. If they can not meet their cash reserves they must reduce their investments. That includes reducing the amount of loans they make as well as selling some of the investments they that used to hold, such as mortgages. When they do that the value of those mortgages declines, there is an over supply of mortgages because all of the other banks and investors are in the same position. When the value of the mortgages goes down there is fewer foreign investors willing to spend their money at the current value.The only ones that are willing to do that are people that can buy it at a significantly lower amount which lowers the value even more. Which also means that the banks will have to sell even more mortgages to meet their reserves. So the bank ends up with a bunch of mortgages they can't sell to anyone. Normally when the price goes down, eventually it draws investors back in... that doesn't work if there is no one to actually pay those mortgages. Without Joe being able to pay his mortgage there is no longer any real value in the market. Because, the fact of the matter is that Joe is the one paying the mortgage and what investor is going to buy the mortgage of someone who doesn't have a job. That prevents the mortgages from regaining value when investors decided that prices are low enough, because there is still no one to buy the mortgage if there is no one to actually pay the mortgage anymore. The only remaining value in those mortgages is the foreclosed value of those homes, record foreclosures destroy the Real Estate market. Even those people that have jobs and can pay their mortgage lose value in their homes and can't get the new Second to build a swimming pool and the swimming pool company goes out of business.
That is why the government wanted to do a bailout for the banks so that the banks did not have to cover their reserves and they could continue to lend money. Unfortunately it didn't help because Joe still doesn't have a job and his wife still can't go grocery shopping.
Ultimately what needs to happen is that people need to go out and spend the money that they would have spent had there been no rumor. To buy their groceries and watch their televisions and buy their cars and do all the things that people do when the economy is striving. Because then Joe has a job, he can pay his bills and put money in the bank. The bank can lend money out and the economy can continue to strive on the CONSUMER CONFIDENCE.
Here is my call to action: Go out and spend your money, encourage your friends and family and co-workers to spend their money... this is the only way that you can ensure that we all have jobs tomorrow.
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.