In today’s metro business section, Richmond Times-Dispatch takes a closer look at the legal industry in the Richmond metro region and how Richmond has evolved into a “city of law and order”.

Chmura Economics and Analytics helped Times-Dispatch reporter prepare the story. Chris Chmura provided a series of data regarding the size and wages of the legal industry in the metro area. The paper quoted her in the article, City of Law and Order:

The average salary of people in the legal profession in Richmond was $77,000, compared with an overall average salary here of $44,270 in the third quarter of 2007, according to Chmura Economics & Analytics.

"When people are being paid more, they spend their money," said Christine Chmura, president of the Richmond research firm. "It has a ripple effect."

In a separate story, Legal jobs help drive economy in Richmond, Xiaobing Shuai analyzed how legal industry help create jobs in other industry sectors.

At the end of last year, 5,838 people in the Richmond area were employed in the legal industry. An additional 1,685 workers here support the legal jobs, said Shuai, who analyzed wages, benefits and productivity to compute the numbers.

With no end of the housing downturn in sight, more and more people's life are affected, not just the mortgage bankers or real estate agents.  Those people affected include home inspectors, landscapers, and truck dealerships.  Richmond Times-Dispatch did an article on how all those businesses are negatively impacted by the housing return. We helped them analyzing the ripple effect of the housing downturns. 

If the housing decline had not occurred, the economy would have grown by an estimated $266 billion in construction and related services, according to an analysis by Xiaobing Shuai from Chmura Economics & Analytics in Richmond. The information is an estimate based on U.S. starts, which are down 56 percent in December from the peak in January 2006.

For complete article, please visit the Times-Dispatch website.

Question From: Michael Schwartz

"I'm working on a story and I was hoping you could give me some insight. It's in regards to nontraditional mortgage products, such as interest only and option ARM loans. These were hot during the housing boom but now it is becoming apparent that many people may not be able afford their monthly payments due to the fluctuations in the market and interest rates.

I was wondering if we could discuss what type of economic implications this might have when people either default on their loans, don't make much of a profit on selling a house that they likely could not afford in the first place.

What do you think?"

Both interest only mortgages (IOM) and Adjustable Rate Mortgages (ARM) can help borrowers lower monthly payments on their homes. As a result, borrowers can afford more expensive homes with those options.

Those options are not for everyone. ARMs make sense only if the mortgage rate at the time of loan origination is high, and the interest rate is expected to drop in the future. Both options are fine for borrowers whose future incomes are expected to rise.

In previous years, due to the rapid appreciation in housing prices, many home buyers utilized the ARM and IOM to be able to afford a home. Many ARMs will reach their first adjustment soon, and an IOM originated in early 2000 will also expire soon. According to data from Economy.com, nearly 25% of all outstanding U.S. mortgage debt is due for an interest-rate reset within the next two years. Some $400 billion in loans will get a new rate this year, and another $2 trillion are set to move in 2007. When that happens, home buyers will see their monthly payment increase significantly.

It seems the economic consequence of ARMs and IOMs will be more severe in 2007 than 2006, but reports have surfaced that some home buyers are struggling with increased monthly payments. The initial effect is that people will squeeze consumption elsewhere to make the monthly payment. They may reduce spending on vacations, shopping, or restaurants. That will have a negative effect on the overall economy. If a reduction in consumption is not enough, home buyers may tend to take out more debt—both in terms of credit card debt or personal loans to cover the payment, hoping that their income will increase, or interest rates will go down in the future.

If the jump in monthly payment is too high, the homeowners may have no choice but to sell their houses or default on their mortgages. For IOMs, since home buyers do not pay down their principals initially, and home price may stay flat or decline in the near future, rather than building some equity, home buyers owe banks money when they sell their houses. That will put them in a worse financial situation. After the sale, they still need to reduce their personal consumption to pay the debt. Some homeowners may also default on their mortgage and lose their homes.

ARMs and IOMs can bring personal hardship for households involved, as losing a home is a traumatic experience. How broad its effect on the overall economy will be depends on the region. In places where the housing market was hot, such as California or Florida, more people are using IOMs and ARMs. The resulting negative effect will be more serve than Richmond or Hampton Roads, where housing price appreciation was moderate. Another fact that the negative effect is limited is that the Fed is probably at the end of their rate hikes. The mortgage rate (30 Year fixed) is 6.5% now. According to historic standards, this rate is still low. The implication is that jumps in monthly payments may also be as large as feared. More people may be able to cover the increased payment through reducing consumption elsewhere rather than selling their homes or default on their loans.