Ted Allrich is the founder of The Online Investor and author of the just released book: Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he'll offer advice to investors who are just getting started.
Oil's surge is over. Having reached almost $150 a barrel, it now trades near $100, as of this writing. It may be lower when you read this. That's good news on many fronts. But lower oil prices aren't enough to get this economy back on track. For that, real estate, and in particular home sales, and employment need to rebound in a meaningful way. Here's why.
Let's first look at oil. It's used for many different products, from gasoline to lubricants to tires, etc. Lower oil prices will make filling up at the gas station much less painful. That will give consumers a little more money in their wallets every week. It also lowers the cost for manufacturers using petroleum in their products.
That's all good. And since the price of natural gas, used in many homes for heating, often follows the price of oil, it may be that heating bills will be lower this winter. Again, that makes consumers feel better and actually saves money.
But these are not enough savings for consumers to feel it's OK to buy a new car or a new dishwasher or other large appliance, much less a house. These major purchases only happen if unemployment isn't a daily topic of discussion at the dinner table or when house prices are rising, generating real wealth. If consumers feel their jobs are safe (if they have one) and their homes appreciating, they have confidence in the future and are willing to buy something on credit or save enough to buy it outright, knowing their savings will be replaced over time.
The two biggest factors that need addressing for an economic rebound are jobs and the housing markets. They're the main drivers of the economy. This isn't to suggest that everyone can go back to the over-leveraged days of borrowing every penny out of a house to go on buying binges. Rather it's the basic ability to sell a home, take the proceeds and buy another or use some of the funds to buy other things. That requires lenders to loosen credit a little, not imprudently, so that creditworthy (and that's the key word) borrowers can have access to credit to make purchases they are now deferring, including buying a home.
Real estate is responsible for many jobs as well as wealth building. It's not just the brokers, lenders, carpenters, roofers, brick layers, tile setters, and dry wall experts. There are also the appliance manufacturers, the lumber mills, and right on down the line as you think of all the materials and products that go into a home. Taken together, they're a large part of the gross national product.
So what's the answer to the real estate problem? First, lenders need to get out of their catatonic state and start to lend again but only to consumers with the ability to pay back the loan. Pretty basic, right? The problem is with many banks and other lenders is that they take a bifurcated approach to lending: they either lend or they don't. There's no middle ground. Lenders need to get closer to the middle where solid borrowers have access to money.
Another way: lenders need to be more proactive with their current loans. They need to aggressively seek out marginal borrowers and work out terms with new, lower interest rates and longer pay offs. This may cost the lenders some money but most likely not as much as if the borrowers simply trash the homes and walk away. Only after the inventory of foreclosed homes dries up can other home values begin to appreciate.
Which now brings us back to the other key ingredient for economic well-being: employment. More jobs are created when people buy things. It's that simple.
When consumers feel confident enough and have access to credit, they will buy more. And buying more doesn't mean buying luxury items or unwanted goods.
Rather, it's about buying the basics like a more fuel-efficient car or better groceries or any number of every day items that people need. Sure, some will get right back to buying outrageous stuff, but that's human nature. The key here is to have the demand for the goods and services which in turn creates more jobs.
That's why the real estate market is critical to the solution of our economic dilemma. It creates jobs. It creates wealth which can be accessed by borrowing against the home which in turn allows people to buy more goods and services which creates jobs.
Lower oil prices are great. Let's hope the black stuff trades below $50 a barrel again. But it's not enough, on its own, to make the difference the U.S. needs to get back on economic track. For that, we need real estate to get healthy.
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Reader Comments (Page 1 of 1)
9-07-2008 @ 9:23AM
henry said...
funny how oil is off about 25 percent from high but retail price is down far less, someones making a killing
9-07-2008 @ 2:07PM
Steve said...
Please tell me why big corps. have everything made overseas that has to stop and bring it back to the U S of A I cant believe this Goverment is allowing this to happen.I just lost my job after 36 years to out source. Im tired of buying things that say made in china. thanks for listening, I love this country i am a vet of 2 tours in vietnam, i sick of seeing my country die slowly.
9-07-2008 @ 2:58PM
Lucy said...
AMEN. I spent 30 years selling residential real estate. We need to start selling those foreclosed homes and help owners stay in their houses rather than having them run from their promise to pay.
9-07-2008 @ 3:06PM
gumbo koontz said...
Why is every blogger leaving shareholders out of the story?? Shareholders invest and create jobs, yet workers (unions ) think they can take everything from shareholders with excessvie benefits and wages ,etc. Look at GM and Ford. Boeing and General Electric will be next. Dont laugh at me.... Unionis, I tell you,,, get a grip!!
9-07-2008 @ 5:07PM
gumbo koontz said...
Our economy would be helped a lot if oil stocks are dumped now before it crashes as it will someday. also gold stocks... Oil investors are hard at work trying to slow us down by holding on oil stocks and praying that oil prices will go up again... they are wrong!
9-07-2008 @ 5:44PM
Michael said...
America is based upon our entrepenurial spirit and that is what has made us a world power. Obama wants to tax those very entrepeneures who are willing to risk their own capital to establish businesses that will provide the jobs our economy so desperately needs. Obama doesn't understand economics or how America came to be the economic power she is today. He wants our small business peope to not only work for the business they've started, but he wants them to work for the government as well...a government that will provide free health care for anyone who asks.
9-07-2008 @ 6:29PM
gumbo koontz said...
Nobody can single out Democrats for screwing around with our free enterpises. Democrats are usually very careful about being so forceful against businesses. Democrats enacted countless bills and laws that we already took for granted . In a nutshell, if you get rich or too rich especially with billions in your wallet and dont know what to do with that newfound money. Just watch out, moron! simple as that! You are free to get so rich as long as you reinvest them intelligiently. If you dont, the general public will look at you as a rich moron not knowing what to do with your money other than buying a personal jet and a yacht.... This is not the stuff America is great on... Tax the rich morons until they wake up !!
9-07-2008 @ 10:53PM
Wind4me said...
Oil production being cut by OPEC and Hurricane Ike coming full bore into the gulf only means one thing........HIGHER OIL PRICES coming! Why this govt has NOT got with the Green Jobs 4 America program with WIND and SOLAR is beyond me?????
www.Wind4me.com
9-08-2008 @ 2:08AM
Chris Lalor said...
Replying to Steve :
Steve said...
Please tell me why big corps. have everything made overseas that has to stop and bring it back to the U S of A. I just lost my job after 36 years to out source. Im tired of buying things that say made in china. thanks for listening, I love this country i am a vet of 2 tours in Vietnam.
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Steve highlights the major, major challenge of all Western countries. We cannot compete with China, India, Vietnam or any other 3rd World country on price. If the West is to continue it's existing economice level 2 things have to happen. There has to a massive, I mean massive a la Marshall Plan scale, education/training of our workforce we need to turn our non-skilled into highly skilled. Then we need to introduce a recognition system on all imported goods declaring that the supplier does not employ children and that the workers are free to join trade unions. Lastly 3 world currencies must be forced to "float" against the major Western currencies. Only then will you get anywhere near "free competition" BTW I firmly believe any Vietnam vet should be paid a salary from the US taxpayer for life.
9-08-2008 @ 2:04PM
Ken said...
To: gumbo koontz : Sorry gumbo but a share holder has only one reason for his/her skin. To provide cooporations with equity financing. There is way too much interferience with US companies by investors who want to day trade and make hugh instant profits short term. This attitude is devistating to not only our companies but employees as well. If you don't like it you can just sell your interest in a company and go somewhere else to cause problems.