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August 29, 2005
Biggest economic hot buttons? Mon., August 29, 2005, 3:30 PM
I received the following letter from a registered financial planner I've known for many years. While I think the impact of high energy costs (being related to just high gasoline fuel prices) is well off the mark, I do agree that the cost of homes as well as the debt on those homes are potentially bigger economic hot buttons.
The biggest button, however, ought to be reserved for the word "inflation".
Bill, I have been reading much lately about the affect of higher oil ( fuel ) prices on the N.A. economy and how current prices are inevitably going to drive down the economy. In my view, far too little attention is being given to the negative effect of rising mortgage interest rates.
A 50% increase in the cost of gasoline, for example, results in an average monthly increase of perhaps $60 per month on fuel for the median family. According to the Nat Assoc of Realtors report in a recent FT of London article, the national median existing-home price in the US in July was $218,000 vs. $191,000 in July 2004 (+14%).
If we assume that the avg such home has a 100K mortgage at 5%, a rise to 6% will increase monthly costs by the same $60. I believe, however, that those actually in the housing market today are assuming much more than 100K of mortgage debt, on average.
It is reasonable to think that an increase of 1% in mortgage rates will occur long before we see another 50% increase in gasoline prices. In fact, a rise of mortgage rates to 7% from present levels would have four times the affect of the recent 50% rise in gasoline prices.
You can alter driving habits, conserve, downsize etc to deal with rising fuel prices, but you can't saw off a bedroom or two to get the cost of your housing down in the near term. Put in a squeeze, North Americans will do what they have done in the past - avoid or bail out of high-cost housing and stay mobile.
As I see it, house price and mortgage interest rate moves are the real economic hot buttons - not oil prices, at least in North America."
High energy costs affect the average person in more ways than just gasoline to fill their auto. They also have to pay higher fuel costs for their homes, and higher consumer prices ranging from the products and services they buy that have any oil or gas component, and that includes airline fares, and costs of food/clothing that has to be shipped, as well as a host of products that are derived in part from oil. And that's just the half of it.
But the point was well made that we are in a rising cost environment, which is very much affecting the average person.
And the point I'd like to make is that this pain is not for gain. It is inflation, which I define as higher costs without a related increase in wealth.
Inflation affects capital markets. Inflation is the real hot button.
Posted by Posted by Bill Cara on August 29, 2005 03:31:09 PM | Category: Economics