When will the economy start to improve? This is anyones guess. But a few things need to happen before consumer confidence will turn around. The subprime meltdown has caused a mental picture of wealth to scarcity to occur. When people felt their homes were worth a lot of money and they had equity, they would be more eager to spend. Now the statistics for equity in home for homeowners is frightening. More than 1 out of 6 homeowners are upside down in their mortgages. This means that they owe more than their home is worth. When this occurs, people are going to hang on to their cash. That home equity line is closed or has been reduced by the bank. Many people used their home equity lines for cars, home improvements or vacations. When the equity is gone there is going to be a pullback in spending. When their is a pull back in spending, companies are not making as much as they were in the past. Thus you have people that are losing their jobs. These people are no longer discretionary income and are just happy to get by every month.
What Will Fix The Economy?
How will the economy get fixed? Hard to say, the first thing is that we need to get consumer confidence back and job stability. When people feel secure about their jobs, they will buy. They will buy cars, they will buy houses and they will take vacations. John McCain wants to focus on bailing out homeowners, but I think we need to focus on stabilizing the job market and consumer confidence first. The 300 Billion could be better used to stimulate jobs. Once we have this under control, people will go out and make a home purchase. I do think that the banks will need to step in and modify some of their terms. There is nothing wrong with doing short term forbearance agreements with people until things turn around again. We survived the real estate crash in the 80′s, we will get through this one.