With financial markets dipping (or not as much as they should be), interest rates have become this crucial “tool” that can dictate our possible (and probably rightly deserved) recession or bounce our ever growing, boastful economy back. The belly up of the sub-prime mortgage market and this ever growing list of housing foreclosures truly has to be only a ripple of what is to come. In the metaphorical sense, consider this situation a tsunami, starting small but gaining height and devastation as it sets its sight on land, or a crashing economy. Of course I’m talking in the dire sense and not the most likely reality, but consider some numbers for a minute. According to the National Association of Realtors, new homes sales are down 23 % from June 2007 to June 2006*. As if that isn’t bad enough, $370 billion in adjustable-rate mortgages will reset this year, according to First American CoreLogic*. The upward adjustment of interest payments on these loans will increase foreclosures much worse than we are yet to see. Thinking this financial crisis contains itself to the housing market can be a big mistake. Consider not only the products purchased to build the house but also the products that inhabit a house (big screen TV, refrigerator, beds, etc). Luxuries become an after thought.  Automobile sales are already falling as well are boat sales. With this lapse in overconfidence of a bullish housing market, the lending of other industries, such as autos, are being rethought. Penn State’s Smeal College of Business just conducted a study on auto loans which recommends lenders take a risk based approach to auto lending. The study concluded that “loans for European and Japanese cars had a lower default rate (2.9 percent) than loans for American cars (4.7 percent).” In essence, loans for American made cars should be higher than their Japanese and European counterparts. Imagine (but don’t worry due to lawmakers never letting this happen), the increased competition for American auto companies when their cars become more expensive due to higher interest payments for their customers. That is on top of their continued decline in marketshare to foreign competition and declining profits.

The results of this housing bubble bust have just begun to trickle in but business will be impacted globally and across all industrial markets. I would also like to note, while these investment banks and hedge funds make money hand over fist by offering these subjective and somewhat predatory loans (extra points for use of buzz word), the Fed is now forced to bail them out from their own demise. As  Ben Bernake, our current chairman of Federal Reserve, put it, “It is not the responsibility of the Federal Reserve–nor would it be appropriate–to protect lenders and investors from the consequences of their financial decisions.” So please stop your crying bankers, that’s the risk you take with dealing in markets people, its called risk for a reason.

I’m off for a vacation to the Mediterranean. See you in a few weeks.

Mix I made: Sum ‘07: get your indie fix

* figures taken from this newsweek article “The New Money Pit”