Real estate market prices began declining in 2006, a year before the Dow Index peaked and three years before the Dow troughed in 2009. Lost construction jobs added to the recession’s pain and evaporating home equity demoralized families. Unemployment caused some mortgage defaults and prevented others from even considering a home purchase. Today, 11% of homes are vacant and 23% are “under water,” nationally. Banks are hyper-cautious with new loans. Those who want to move elsewhere are often forced to swallow big losses or become unplanned landlords. Local governments face lower real estate tax collections, yet higher costs for social safety net programs. The Federal subsidy program for new home buyers is over. The Federal Reserve’s “Quantitative easing” bolstered stock and bond prices offsetting some of the pall from real estate.
Going forward, the US economy faces miserable domestic and international conditions of unknown durations. Repairing nuclear contamination in Japan will be costly, slow, and a precursor to getting Japan’s economy vibrant again. Japan produces components needed for many US high tech products. The “Arab Spring” seems contagious and might affect countries exporting large quantities oil to the US, causing severe disruption. Financial weakness, entitlements, and “politics” in Ireland, Greece, Portugal, and probably Spain will sap the EU’s vitality as an importer of US goods. The US economy itself shows anemic growth, high unemployment and millions more who “gave up looking for a job.” Expected US interest rate hikes will dampen growth. US politicians seem unable to make wise choices among right-sizing the national debt, hiking taxes, and tackling entitlements. Against this backdrop “real estate” is a secondary issue.
Much of the damage attributable to real estate has already been done. There remain emotional issues like robo-signing, principal reduction, strategic default and how to reform Freddie and Fannie roles, but the key issues for the US economy are How much deeper and when will prices get back to normal? Credible analysts generally see no early improvement. One thoughtful analyst suggests the trough will be in the first quarter of 2013 at two-thirds of the housing bubble’s peak (first quarter of 2006), and getting back to normal will take until 2016, a decade since decline began – and about 6 years after the recession of 2008 was over. Real estate won’t help the recovery.
Alan Daley is a retired businessman living in Florida. He follows information technology from the consumer’s perspective