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Economics, Industry NewsJob growth key to housing recovery
There have been times when housing (and other real estate markets) moved in the opposite direction of the overall American economy. For example, during the early part of the decade, when returns from financial capital were very low, the returns to real capital galloped along at very high rates. In the early 2000s, common stock returns were abysmal, yet REITs earned highest sector returns. House prices continued to advance despite low rates of return in other markets.
Times have changed. Currently the conventional wisdom is that housing is hurting the overall economy’s ability to recover from recession. Once housing was a performance leader; now it is a drag on the general economy. The real estate industry finds itself in a new position compared with where it has stood for the past several decades.
The fundamental reason for the change is the unprecedented decline in house prices since 2005 (which followed the unprecedented rise in prices the decade before) in virtually all housing markets. It is true that some markets have declined more than others (and Pennsylvania has experienced only moderate declines in most markets) but the American housing market had not fallen significantly for consecutive months since the 1930s.
Many commentators warn that if there is additional bad economic news, house prices may react sensitively in the short run. For example, recent poor jobs growth reports have already limited housing’s recovery. Rising unemployment could lead to additional defaults and foreclosures and perhaps to the feared “double dip” recession. On the other hand, positive economic growth can lead to much better expectations about house prices for the future and in turn could stimulate new demand for housing. Regrettably, few economists are predicting a return to high rates of growth.
Sometimes the absence or costliness of mortgage finance constrains housing demand. Current mortgage interest rates remain at record low levels and inflation is nowhere in sight (at least not yet). In this case, the availability of housing finance is not really an issue in U.S. housing markets.
Edward Learner, a UCLA business economist, argues that a “tepid economic recovery” is the best we can expect since the housing sector cannot pull the overall economy back to positive growth. In fact, he and others look for a weaker second half of 2010 for housing markets compared to the first half and the expiration of the tax credits. Diane Swonk, chief economist at Mesirow Financial, is quoted as saying, “this is a recession that was induced by housing, and housing is not going to carry us out like it has done in the past.” (realtor.org, June 23, 2010)
So what should we expect? Much depends on the employment picture and its impact on house prices over the next several months. If job growth returns, prices will continue to stabilize and market demand will improve. But without additional jobs and with the anticipated drop after the tax credit expiration, foreclosures may rise during the remainder of the year and into 2011. This will increase the supply of homes on the market and put new downward pressure on prices. Negative equity already affects up to 40 percent of households in the country. There is also talk of some 4.5 million homes in “shadow inventory,” homes being held off the market as households wait for better news.
Optimists often talk about pent-up demand appearing any month now. My fear is that this illusory demand, if it does appear, will be dominated by a macroeconomic-induced new supply of housing. NAR President Vicki Cox Golder recently wrote that homeownership remains the American Dream. (www.usatoday.com, June 22, 2010) I certainly agree but the future continues to remain a challenge for the months ahead.
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About Austin: Austin Jaffe, Ph.D. is PAR's Consulting Economist from the Smeal College of Business at Penn State University. |
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AS I believe a candidate for President once said: “It’s the economy, stupid.” I find as a REALTOR(R) that in times of high unemployment, even people with jobs are skittish–they are thinking, well, my neighbor lost his job, or my spouse did, etc. Great article as usual.