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What Will Recovery Look Like?



September 08, 2009 – Comments (6)

Mish has a post about consumer spending and job creation.

His post really points to why I am such a bear on this market and I am a long term bear. 

Many think that consumer spending will return once job creation picks up. Actually, there is so much consumer debt, and for many, no reasonable way to service it, that consumer spending is likely to remain weak and defaults high even after unemployment starts inching back down.

My husband is a lawyer and our household income has always been in the top 20% of households because of his income.  We were supposed to be that double income no kids high spending consumer, but the housing bubble of 93 made it so we spent an enormous amount of our household income on housing and it simply did not seem to get easier.  It did not get easier until we sold the home and I took my current job.  So, for 14 years, without a family to support, we were exceptionally modest consumers relative to income.  And what I saw around me is many peers were not making ends meet, or just staying flat, and not making any kind of dent into debt at all. I suppose I was always concerned about the future so I pushed to make a dent into debt, and it is what saved us when my husband got a 23% pay cut.

I used to say that if everyone spent the way we did the economy would stall to a halt, and I don't see any other reality except that many people have a level of debt that leaves very little to stimulate the economy, which will make the economy sluggish for years.  I got rid of 19 year old vehicle last year, but had I stayed in Vancouver I would still be driving it and simply would not have plans to replace it.

I am very fortunate right now in this economy, but I was chatting with an engineer friend and getting work has been so bad for him he described his finances as an out of control train that seems to be coming to the end of the tracks...  He is doing work unrelated to his career, at about half the income, just to have some income coming in.  I think this kind of thing is happening at a rate not seen in most people's living memory.



6 Comments – Post Your Own

#1) On September 08, 2009 at 6:01 AM, dbjella (< 20) wrote:

Hats off to you dwot.  When I was married my ex was always trying to "keep up with the Jones."  I was probably the dumber of the two :) but I finally realized we didn't see eye to eye on finances.

I also agree that spending will not return to anywhere close to previous levels.  I have some friends who are DINKs as well and they are now short selling on their two homes.  Ouch for them and the economy!  

I don't really know when the world will see a bottom, but I worry that as a society we have admonished high debt for consumers, but haven't "gotten it" for Gov'ts.  I think the US debt is unsustainable :(  

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#2) On September 09, 2009 at 11:40 AM, ByrneShill (82.32) wrote:

Yeah, but the whole country isn't like Vancouver. Actually Vancouver is in a bigger bubble than Florida ever was. The same condo/house is 3 or 4 time more expensive in Vancouver than it is in Montreal or Toronto. And Mtl/Tor are more expensive (2X) than Winnipeg, Quebec city or Halifax.

The Vancouver housing market completely distort the whole economic environment of the city. Financially conservative DINKs in my area can have a lot of discretionnary spending. A 110k$ household income with a 200k$ mortgage at 3.5% can easily pay their house in 10-20 years without sacrificing that much.

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#3) On September 09, 2009 at 6:04 PM, dwot (29.03) wrote:

ByrneShill, the bubble I refer to was not bigger then the current Florida bubble.  You are comparing to today's bubble, yet I speak of the consequences of a bubble that put housing costs at 4 to 5 times household income back in 93.  Vancouver's housing costs have been the highest in Canada since the early 90s.  Today's bubble in Vancouver is so high that I suspect there will be quite a few that won't be able to service their debt.

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#4) On September 10, 2009 at 12:39 PM, ByrneShill (82.32) wrote:

Okie, not Florida's bubble, but 4 to 5 times household incomes is a bubble. Right now people pay 2 to 2.5 times household incomes in my area, and with those low interest rates that debt is easily serviceable and some discretionnary spending is still possible (until rates go up at least).

I kinda fear for Vcvr when rates will go up. Even just a percent will hurt like hell on those 500k$+ mortgages. Many specuvestors are already subsidizing their tenants, it won't be pretty if (when) they have a few extra grands to pay every year but can't raise rents.

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#5) On September 10, 2009 at 5:33 PM, dwot (29.03) wrote:

Yeah, there are areas where debt is very manageable, but the weight of the screwed up areas will pull those areas down.

I think half a percent would hurt on a $500k mortgage.  I don't think a lot of people are that high as most people that own homes that are selling for over half a million bought them, or another home, when they were much more affordable.  But, $300k of debt, even if the payment seems manageable, is an enormous long term burden and there is an enormous risk with that should interest rates go up.

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#6) On September 15, 2009 at 3:36 PM, JaysRage (78.09) wrote:

I agree with you.     A large percentage of people that I know are buried in debt.   I know many people that are looking for jobs and many others that are under-employed.   Some of them have loans that they cannot make payments on, and the banks are so afraid to take the losses that they continue to forgive missed payments in order to not have to re-possess or foreclose.    

We are also a dual-income household, and my wife and I are very frugal, so we're doing just fine in the down-turn, but I look around at the mess around us, and it's mind-blowing.     We've picked up a few bargains here and there on different things and picked up a few bucks on the recovery in the market, but we feel no real drive to drop a lot of money on anything.    

Where is the recovery going to come from?   

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