Monday, August 3, 2009

The Ripple Effect

Ever heard of the term “the velocity of money”?  (Think back to Econ 101.)  It refers to the number of times each dollar is spent as it passes through the economy.


For example, suppose an artist sells a painting for $50.  She spends some of that money to buy ingredients for a nice home-cooked meal and a good bottle of wine.  The grocer then buys more wine from the winemaker and produce from the local farmers.  He uses his profit to take his wife to the movies.  The theater owner uses some of this money to buy flowers for his wife.  The florist stops at the local coffee house to buy a mocha.  Etc. etc.

That $50 earned by the artist becomes $200, or $400, or $600, as it passes through the economy. (depending on the velocity of money.)

Except when it doesn’t.  And these days it seems like it doesn’t more often than it should…

We had a client who was buying a home.  He & his wife were excited about the house, the neighborhood, and making the house into a home.  Then, out of the blue, his employer laid him off – “his services were no longer required.”  Ouch.

Thankfully it happened BEFORE he closed escrow on the new house, as he now has a much more important need for that downpayment, along with the money he was going to spend on carpet, paint, furniture, etc.  But what happened to the economy at large?

* Employer saved an annual salary.

* Employee goes through emotional & possibly financial turmoil as he gets his life put back together.

* Realtor (Chris) does not earn a commission (in this case equal to an average monthly salary.)

* Realtor (Heather) does not earn a commission (in this case equal to an average monthly salary.)

* Chris & Heather’s broker does not earn a commission.

* Listing agent does not earn a commission, at least not at this time.  He/she might earn one in the future if he/she re-sellls the home, although at twice as much work.  But we all know anything can happen, and this is not guaranteed.

* Listing agent’s broker also has at best a delay, and at worst a complete loss, of commission.

* Buyer’s mortgage broker does not earn a commission.

* Title officer &/or title company’s office manager earns a bonus based on the amount of business the office does; her bonus is now smaller.

* The movers now have one less move this month.

* New flooring for this house wouldn’t have much impact on Home Depot’s annual profits, but the carpet installer could use the work.

* Same thing with the painter.

* And with the appliances.

* Furnishings and decorations – anything this homebuyer purchased from a local/independent artist, or shop, or boutique, would have a direct effect on that person’s income.

That’s over a dozen people, just off the top of my head, who have been directly impacted by this employer’s decision to save an annual salary.  Now add the velocity of money, and think about how big the ripple effect really is..

This just sucks, all the way around.  Seems like there aren’t any winners right now..

Your wondering when things will turn around Realtor,

Chris Butterworth