By John W. Schoen Senior Producer
msnbc.com
updated 8/5/2007 4:32:08 PM ET 2007-08-05T20:32:08
COMMENTARY

As the housing market continues to grind through its worst slump in over a decade, some readers, like M.H. in Columbus, Ohio, are wondering how long it will take before the economy starts to slump along with it. But there are still some buyers out there. Frank in Missouri is getting ready to buy a house and  wants to know if shopping for a mortgage is going to hurt his credit score.

If the "housing mess" gets worse and the ripple effect works its way through every aspect of the U.S. and world financial markets, more so than anyone thinks/predicted, could it lead to the collapse of the U.S. economy, possibly thrusting the country into another great depression or worse?
--
M.H. Columbus, Ohio

Anything is possible, including the destruction of Columbus, Ohio, by a huge asteroid.  But a lot more things would have to go wrong for the U.S. economy to “collapse” and get stuck in a extended contraction on a scale comparable to the Great Depression.

First off, the immediate cause of the housing slump is the end of an unsustainable boom that was fueled by (in no particular order): easy lending, rampant speculation, fraud and predatory lending. So part of the contraction in housing is from a ridiculously overextended level.

It’s quite possible that a prolonged, deep slump in homes sales and construction could bring a recession, which often is defined as two or more consecutive quarters of negative growth and/or job losses. That’s what happened the last time real estate hit a major slump, though the resulting recession in 1990 was relatively mild as these things go.

There are some people on Wall Street who worry that we haven't seen the worst of the mortgage mess. The stock market's big sell-off Friday was due largely to fears that losses by big banks and other investors may be worse than originally thought.

There are also fears that interest rates may be headed higher as lenders demand more money to offset what they see as increased risk. If those fears go too far, we could see a "credit crunch" — when a widespread slowdown in lending throws sand in the gears of the economy.

In any case, we’re not seeing signs of a national recession at the moment. Though job growth seems to have slowed a bit in July, the economy turned in a solid 3.4 percent annual growth rate in the second quarter and added 2 million new jobs in the first half. Economists who keep an eye on the data see a higher risk of a downturn than they did six months ago, but the general consensus seems to be that the odds are still against a recession.

One major reason the economy is holding up so well is that in many parts of the world —where they probably haven’t even heard of the U.S. housing slump — the economy is growing even faster. That’s helped raise demand for U.S. products from overseas.

Still, parts of the economy are hurting. Manufacturing industries are still shrinking, shedding some 175,000 jobs over the past 12 months. Despite strong overall job growth, some regions are lagging. Ohio, Puerto Rico and Michigan posted net job losses in the first half of the year.

And, to be sure, the housing industry itself is in a deep recession; many of the people who have lost homes are in dire financial circumstances. But a housing slump, by itself, doesn’t necessarily drag the rest of the economy with it. The housing industry represents a relatively small piece of the U.S. economy: about $1.5 trillion of the $13.8 trillion in GDP. Government spending at $2.7 trillion makes up a bigger piece of the pie, for example.

Some 70 percent of the economy is based on consumers buying goods and services, anything from food to health care to trips to Disneyland. Demand for these products and services remains strong. As long as people have the money to spend, and they keep buying, the economy should be just fine. There are some signs that consumer spending is taking a hit from higher energy prices and worries about the housing market. But so far, overall wages have been going up.

Mortgage defaults are probably still rising. But the overall dollar impact of these painful events  is still relatively small.

By way of comparison, the meltdown of the savings and loan industry in the late 1980s — and the resulting real estate collapse and recession — eventually cost taxpayers hundreds of billions of dollars to clean up. That real estate boom was largely built on commercial projects —collectively worth much more than the residential boom we just went through.

Today, commercial real estate is holding up well: Next time you’re visiting a city, count the cranes on the downtown skyline. Many cities are seeing strong demand for new office space.

A lot depends on how consumers, investors and especially lenders react to the current situation. So far, the economy seems to be taking the housing slump in stride. Consumers, while they report to pollsters that they’re nervous, are still spending and, overall, wages are going up to help them pay the bills.

Despite recent steep plunges, the stock market has been in the grip of a long bull market. And while lenders are getting choosier about who they lend to, interest rates are still relatively low and money is still available to solid borrowers. If we all get spooked, the resulting bear market and pullback in lending and spending could make things worse. But even then we’re a long way from a depression.

So do your part: Take a deep breath, relax and keep spending.

I am getting ready to purchase a house and wanted to know what my FICO scores were so I purchased a copy from the three main credit reporting agencies. In the reports I noted that in the tips section it stated that too many credit checks can hurt your score. While my score is from 770 to 790, how can I shop around for the best mortgage rate without hurting my FICO score?
--  Frank J., Holts Summit, Mo.

Not all inquiries count against you — especially if they are clustered during a short period when it's clear you're rate shopping.

To save yourself time, try one of the independent personal finance sites like bankrate.com. They'll provide updated info for loans available in your region. You won't know for sure until you contact the lenders and confirm the terms. And keep in mind that low rates aren't the only criteria — especially if it lands you with a lender you've never heard of who may be floating teaser rate loans that mysteriously dry up when you formally apply for the loan.

Lastly, with a strong 770 FICO score, keep in mind that you should qualify for the most attractive terms. Avoid any loan that requires a prepayment penalty. Ask who is going to service the loan. Don't get steered into exotic loans like option arms or "low-doc" or "low-down" loans that increase your costs.  These are the "subprime" loans that many people with perfectly good credit have been sold — because they generate much more income for the broker.

Above all, ask lots of questions. If you don't get good answers, take your business elsewhere. Customers like you with good credit histories are still in great demand by lenders.


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Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.36%
$30K home equity loan FICO 5.07%
$75K home equity loan FICO 4.50%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 10.96%
10.86%
Cash Back Cards 16.48%
16.41%
Rewards Cards 15.99%
15.95%
Source: Bankrate.com