Experts predict soft landing for economy
By Martin Crutsinger
WASHINGTON -- The economy has slowed down. Gasoline prices hit new highs in early August. And the once-soaring housing sector is rapidly losing altitude, raising concerns it could drag the whole country into a recession.
Just where is the economy headed? Here are some answers to frequently asked questions.
Q: The economy looked so good at the start of the year. What happened?
A: Gasoline prices climbed above $3 per gallon, leaving consumers with less to spend on other items. At the same time, the Federal Reserve was raising borrowing costs for millions of Americans. The Reserve pushed interest rates up to slow the economy and keep inflation under control.
The combination of higher energy costs and interest rates put a severe squeeze on consumer spending, which accounts for two-thirds of overall economic growth. The Fed's campaign has been especially hard on areas of the economy that depend on borrowing. Those include housing; sales have been plunging in recent months.
Q: So is this a good time or a bad time to buy a house?
A: After a five-year housing boom that had sellers firmly in control, buyers are starting to have more power. But real estate experts caution that it may take a few more months before stubborn sellers start cutting their asking prices.
New-home prices also have not come down much from where they were a year ago, but builders -- facing a record glut of unsold homes -- are starting to throw in attractive incentives such as free appliance upgrades.
Q: If I bought a house in the last few years using an adjustable rate mortgage at a time when mortgage rates were at four-decade lows, what do I do now if that mortgage is about to get reset to a much higher monthly payment?
A: Experts say now would be a very good time to move from an adjustable rate mortgage to a fixed-rate mortgage. That is because fixed-rate mortgages have been dropping in recent weeks. After hitting a four-year high of 6.8 percent in mid-July, the 30-year mortgage has now dropped to a nationwide average of 6.44 percent, according to Freddie Mac's weekly survey.
Homeowners who got an adjustable rate mortgage in 2003 and 2004 at around 4 percent could be facing a jump to 7.5 percent to 8 percent under the terms of their ARM. The new mortgage rate is determined by the index the ARM is tied to, such as one-year Treasury bills, plus any margin the lender is allowed to add. In the current rate environment, borrowers could be facing an increase in their monthly mortgage payment of around $400 on a $200,000 mortgage.
That pain could be reduced if the homeowner refinances to a fixed rate now, when those rates are falling.
Q: What about buying a car?
A: Automakers, who have seen sales slump as gasoline prices have soared, have brought back attractive incentive deals such as zero-percent financing. Deals on year-end models of big sport utility vehicles and other gas guzzlers have been especially attractive.
Q: What are gasoline prices going to do for the rest of year?
A: They may have peaked. Prices have come down about 19 cents per gallon in the past three weeks to around $2.85 after hitting records above $3 per gallon. Labor Day marks the end of the summer driving season, meaning that higher supplies in coming months should keep gasoline prices going down.