Once again, we have that same old disconnect: Wall Street and Washington say that things are looking up, while most Americans continue to believe otherwise, as CNNMoney.com's Paul La Monica reveals in "The Economy Feels Better. Why Don't You?":
Wall Street's celebrating "strong" earnings and the Fed thinks the recession may soon end. But consumers won't be confident until the housing woes are over.
The economy seems to be getting better. That's what Wall Street is telling us. Stocks soared Wednesday thanks to a slew of decent earnings reports.
That's also what C Street -- home of the Federal Reserve -- is telling us. In the minutes from the Fed's last meeting, released Wednesday afternoon, policymakers indicated that the recession could be over "before long."
But on Main Street, people seem to have a decidedly different view. It's hard to find things to be happy about when the unemployment rate is at a more than quarter-century high of 9.5% and the housing market remains in shambles.
The mess in housing -- foreclosures in the first half of the year were up 15% from the first six months of 2008 -- is something that some fear could keep a lid on an economic recovery.
So even though investors, CEOs and Fed chair Ben Bernanke may be seeing green shoots everywhere they look, many average Americans have to squint very hard in order to find them. Just try telling a Zillow.com-obsessed home owner who's watched the value of his home continue to plummet in recent months that the economy is getting better.
"The big unknown variable in the economy still is housing," said Haag Sherman, managing director with Salient Partners, an investment firm based in Houston. "The worst may be behind us with subprime loans, but I don't think housing has found a bottom. We could have a recovery in Corporate America that's much narrower than the recovery in the broader economy."
Sherman pointed out that banks are starting to experience waves of delinquencies and defaults with higher-quality mortgages such as alt-A loans and prime loans.
To that end, JPMorgan Chase, which posted strong second-quarter results Thursday morning thanks to healthy gains in its investment banking division, reported some fairly dismal numbers out of its consumer lending unit.
The bank said that net charge-offs, a figure that measures the amount of debt written off as bad, were $1.3 billion from home equity loans, double the $511 million of a year earlier. And net charge-offs related to prime mortgages quadrupled to $481 million from $104 million last year.
JPMorgan Chase is widely considered one of the healthier banks around. So if it's experiencing more difficulties in its home loan business, it's likely that two of the more troubled big banks, Citigroup and Bank of America, will also disclose more bad news from their mortgage units when they each report their second-quarter numbers Friday morning.
Rising delinquencies could lead to more foreclosures. If so, it's harder to envision a scenario where prices will rebound since foreclosed homes just add to the inventory of unsold real estate.
Steven Kyle, professor of applied economics at Cornell University, said the fear that prices will fall further is discouraging some homeowners from even putting their homes on the market because they're worried about the existing glut of homes.
Kyle added that with unemployment nearing 10% and likely to exceed that level before long, he worries many consumers won't be willing to buy homes -- even if prices stay relatively affordable and mortgage rates remain fairly low.
"Housing is not going to go rocketing off anytime in the near future. Interest rates are already low, so you won't get a boost from that. And unemployed people aren't buying houses," Kyle said.
Sherman said that, ironically enough, more talk of an economic recovery could actually hurt chances of a housing rebound, since it could lead to higher rates in the future.
That's because some fixed-income investors may start to fear inflation and start selling long-term bonds, which would drive up their yields. Bond rates and prices move in opposite directions.
In fact, it's already happened to some extent. The yield on the U.S. 10-year Treasury has surged from a low of about 2% in December to about 3.5% currently.
