American Dream's Harsh New Reality - News & Analysis - Business & Insurance Update - DHI - FIS

American Dream's Harsh New Reality - News & Analysis - Business & Insurance Update - DHI - FIS: "As the housing boom of the early part of this decade unwinds, the U.S. is facing a harsh new reality: Annual home foreclosures may surpass new-home sales from builders. "

Housing appreciation during the boom created the "wealth effect." People borrowed against their houses to send their kids to college, or to pursue a dream, or to start a business. People also borrowed against their homes to buy cars, RVs, boats, and vacation homes. What is wealth, but freedom? Freedom from certain financial fears, freedom to actually say "take this job and shove it," freedom to spend a little more on ___ than you should, but, hey, I can afford it. Lack of freedom creates a poverty effect - I may have lots of money in the bank, but I still have to put up with my boss' B.S. because I need this job, I pay the top tax tier, but I'm still stuck in a house that doesn't suit me, I'm "rich" but I sure can't afford to get sick.

So we're talking about a very small portion of the population actually losing their homes - the referenced article says about 1.8% of households. We aren't mentioning the folks who sell their homes before they hit foreclosure, nor the ones who take in roommates or get a cash infusion from relatives. And the 1-2 million figures assume that employment and the economy stay strong. We're a resilient economy - we've ticked along for a very long time, and we haven't had a Depression since early in the last century.

But. But the economy has expanded on the "wealth effect." Our savings rate has gone negative. People have been spending their home equity, instead of living within their incomes. We outsource the most productive jobs - the ones that create products - and our primary employment sector is services. Oh, sure, services includes financial services and other high-paying service sectors, but services don't build economic wealth for a nation the way building a better mousetrap does.

When I look around my community, and I see jobs sent to China, India, Malaysia, I see people being laid off, I see people losing their homes, I see people dying from a lack of health insurance. I see the Democrats poised to take control of the country, and raise taxes as they go. I see a federal deficit that threatens our national financial security. I see the U.S. Dollar losing value against the Euro (good for exporting, bad for filling my gas tank). I begin to think that maybe I should wait to buy a new sofa, maybe I should be a little more careful with my money. I'd like to remodel my kitchen, but if the housing market keeps dropping, those remodeling dollars are money down the drain.

So I wonder, how can the "wealth effect" bouy the economy to such lofty heights two years ago without the "poverty effect" slamming it back down to earth?