The Hindu Business Line : The unfolding economic downturn in US

Floundering financial institutions and credit markets, falling stocks, uncontrolled inflation and rising fuel prices have made the life of the common man difficult in the US. Not used to such devastating experience in the recent past, the citizens are finding it difficult to reconcile.

For those planning to buy a house the prices look attractive enough, but the typical wait and watch attitude prevails with expectations of a further fall. Though the prices have declined by about 15 per cent in the last one year the rates of interest and the EMIs act as dampeners, particularly viewed in the present context of tight domestic budgets.

Not many mortgage financiers are jumping either, to offer loans. Once bitten, they are a trifle more than twice shy trying to avoid any NINJAs (persons with no income, no job or assets).

Housing demand

Prime areas in California and cities such as Los Angeles, San Francisco, Chicago, Boston, New York and Washington and their suburbs have seen moderate declines compared to others. Increase in demand for housing in cities in general and the large number of migrants are responsible for this trend.

A typical case in point is the large Asian-American population in the west coast. Neighbourhoods where good educational facilities and opportunities for socio-cultural activities are available command better prices. Sellers who have pitched their prices at the pre-scam levels are unable to climb-down in one go and are yet to reconcile to the realities.

Families who have faithfully serviced the loans for even 15-20 years too (typically some mortgages run up to 25-30 years) have to prove their creditworthiness afresh. In these hard times, many have fallen behind by 4-6 months in honouring their commitments. They are desperately trying to renegotiate their mortgages to avoid losing the houses but the rising interest rates and the revised EMIs pose a threat.

As the provisioning requirements and the need to bolster the capital in the illiquid markets are tough to manage, the financiers are slow to settle for lower interest rates or reschedule the repayments. With almost 30-50 per cent of the borrowers queuing up for renegotiating the EMIs or rescheduling the loans such cases are many. They all come with similar sob stories, prompting the CEO of the Countrywide Financial Corporation, a mortgage financier, to comment that ‘all have same wording!’

The poor shape of the economy has begun to influence the mindset of many on spending and lifestyles. Some immigrants are toying with the idea of returning home hoping to be more comfortable with lower costs of living. It may be a knee-jerk reaction as it is not easy to predict the economy in the long run, in developing economies such as China, India, Mexico and Brazil.

Moving house

There are some discerning changes in the habits though how long these changes last is uncertain. Many working husband-wife teams live together in a place of their choice and drive long distances to work. Till now driving even 50-60 miles was not an issue (no big deal!) But today some are contemplating moving closer to their workplaces into smaller apartments sacrificing being together.

The escalation in price is not so alarming but the psychological impact is perceptible. Though per gallon increase is only around one dollar, every time the tank is filled, which might be once a week, the difference of $12-15 appears glaring. To encourage the use of public transport the Californian government has taken some novel initiatives.

On holidays and for special events the ‘Cal train’ (the government-run train service in the State) provided free rides which proved very popular, with the commuters leaving behind their cars to try and enjoy the rides. Particularly, some students and young office-goers promptly switched to public transport, prompting the authorities to increase the frequency. A debate has already ensued on the need to invest more in rail transport. At present Amtrak, the national rail service, runs only on some high density and coastal routes and is considered costlier. The frequency too needs improvement.

Pedal power

Use of bicycles in cities such as Amsterdam or from railway stations to factories and offices in interior Germany is not new. The ecology conscious or health freaks have taken to pedalling to work in the US too. But the initiative this time has come from the city of Paris.

One can hire and travel to any part of the city (incidentally Paris is not a place of long distances) and leave the bike at special parking lots, like hired cars. This has caught the imagination of the citizens. The concept is not new in India as even fifty or sixty years ago many towns had this facility of ‘ride and leave’ to and fro the surrounding villages.

The pocket money of students is no more sufficient to enjoy a car ride. In many cities and suburbs students who love to drive to colleges have taken a fancy for the bicycles. Some have shifted to metro trains or city buses, which run mostly underutilised.

E-learning

Those travelling long distances to colleges and libraries are giving a try to e-learning from home. Families driving on vacation and for picnics have seen a downtrend. Those owning several cars have been keeping at least one or two in the garage.

Using big cars or SUVs made in the US has been the in-thing with many Americans. Slowly these vehicles are making way for smaller and more fuel efficient (Japanese) cars for reasons of economy, convenience and of course for ecological considerations.

Rising fuel costs have had such a dramatic impact on the sale of SUVs that Japanese manufacturers have decided to stop their production and change over to cars. The automobile giant, General Motors has closed down four manufacturing facilities due to plummeting sales.

(The author, a former Managing Director of State Bank of Mysore, was recently in the US. Responses to blfeedback@thehindu.co.in)