by Archie M. Richards, Jr.
August 13, 2007

Some so-called experts are spouting gloom and doom. They're dead wrong. Here are their opinions and my responses. Most of this column is based on a recent article in the Wall Street Journal by Mr. David Malpass, an economist I highly respect:

• In 2007, adjustable-rate mortgages amounting to $500 billion are scheduled for increases in their interest rates. This could strangle the economy.

  Nonsense! A rise of 2 percentage points in the interest rates of those loans amounts to $10 billion in added payments. But during the last 12 months, the wages of nonsupervisory workers increased by $296 billion. In comparison, $10 billion is peanuts. Of course those people who obtained mortgages with no downpayments and low up-front payments may lose their houses and become renters again. But U.S. wage earners overall can handle $10 billion of added costs.

• Mortgages surged in 2004 and 2005, and the money was spent on consumer goods. With this source of extra cash gone, consumer spending will weaken.

  Your facts are wrong. The growth of consumption remained steady. The extra mortgage money was not spent on consumer goods. Instead, it poured into stocks, bonds, and checking accounts. It also slowed the growth of automobile and credit-card debt, all of which is healthy.

• The inventory of unsold homes is huge.

  Wrong again. The June inventory amounts to 7.4 months of average sales in 2007. This is only 10 percent higher than the average inventory from 1980 to 1995. During 1996 to 2005, the inventories of unsold homes were unnaturally low because of the super-low mortgage rates and the 1997 cut in capital gains taxes on home sales. The inventory levels of those years shouldn't be compared with those of today.

• Job growth has depended on heavy housing construction. With this construction gone, the economy will weaken.

  Don't bet on it. During the 2nd quarter of 2007, residential construction was 4 percent of the Gross Domestic Product (GDP), the same level that prevailed in the 1990s. Residential construction boomed in 2004 and 2005 and declined sharply in 2006. But the 2006 weakness was more than offset by strength in commercial construction. Overall, construction is now adding to the economy, not detracting from it.

• 37 percent of net new jobs have been in housing. With those jobs disappearing, the economy will suffer.

  Your 37-percent number is valid only if you count the years that included the 2001 recession. Including those years is inappropriate, because housing jobs during the recession grew while other jobs declined. After the recession, from 2003 to the present, housing jobs have totaled only 5.3 percent of net new jobs. Included in that percentage as part of the housing industry are not only the jobs in residential construction, but also those in real estate brokerage, mortgage brokerage, and mortgage banking. This low a percentage does not signal an economic downturn.

• The current housing bust is similar to the credit slowdown that occurred after the severe Asian crisis of 1997-1998 and will have the same effect now.

  Baloney! The prior period was truly a crisis for emerging markets. But most of those nations are now booming, and all around the world unemployment rates falling. The reasons? The end of the cold war led to an enormous increase in world trade, globalization has brought big increases in corporate profits, governments have responded to the competitive pressures by cutting tax rates, and technology has increased the mobility of capital, enabling it to flow where the profit potential is greatest. Overall, the prospects for economic growth overseas are terrific.

There's more good news, as follows:

• Most U.S. companies have unusually clean balance sheets.

• With profitability high and interest rates low, companies are well positioned to borrow to build productive resources.

• Mergers, acquisitions, and buy-backs are reducing the supply of common stocks.

• A gridlocked Congress is unlikely to do much damage.

America's current housing and mortgage problems are anything but a crisis. Instead, the boom will continue, probably for years.