Do you believe the real estate industry is leading the economic recovery? Let us know your thoughts in the comment section below.
- No. A real estate recovery can only follow a jobs recovery. (89%, 160 Votes)
- Yes. Real estate is the driver of our economic recovery. (11%, 19 Votes)
Total Voters: 179
This article lists the top nine reasons why housing will not lead the U.S. economy into recovery and critiques the misconception that housing is an economic driver capable of rescuing a failing economy.
Nine reasons for housing’s impotence
The housing industry will not rescue the American economy from what has become a Lesser Depression as it has in so many economic downturns that have come before, according to the Washington D.C.-based think tank, The Brookings Institution. [For the full report, see the December 2011 Brookings Institution article, What’s Wrong With American Housing.]
Housing in these economic doldrums suffers from nine identified deficiencies that render it incapable of jumpstarting the U.S. economy, according to Brookings:
- There is an overall lack of households that are willing and able to buy homes.
- Persistent mortgage delinquencies due to falling home prices, rampant job loss and low-quality mortgage products have arrested home sales volume.
- Stalwart mortgage lenders are piously unwilling to participate in federal programs to smother the ongoing foreclosure firestorm.
- A defective mortgage interest tax deduction (MID) policy that subsidizes wealthy owners of high-tier properties while leaving middle- and low-income homebuyers with little incentive to own.
- The reluctance of local governments to zone for the building of housing for low-income households has led to a surplus in housing unsuitable in size and location for many in the population.
- Homebuilders (funded by lenders) tend to overbuild (and over-lend) during prosperous years under the illusion that strong demand will last forever, leading to a glut of properties on the market when times get tough.
- Hundreds of thousands of individuals and low–income households are essentially homeless.
- Home price metrics (median pricing, comparable sales data, affordability) used by housing industry professionals and reported by the media pundits distort the reality of home prices.
- Lenders have overreacted to the subprime mortgage crisis and are now applying overly stringent standards of creditworthiness (read: FICO scoring) to potential homebuyers.
The economic driver fallacy
There is much in this list to comment on, and first tuesday has written at length on all of these ills affecting the real estate market. The Brookings Institution has done well with this catalog of the reasons why the housing industry will not be a panacea for this Lesser Depression as it has in past recessions. But the important point it fails to make is that housing never ought to be considered an economic driver capable of returning an economy to equilibrium.
This approach to thinking of the housing industry as an economic driver rather than an economic indicator has been the fool’s ploy repeated recession after recession in the U.S. and has in many respects led to what we now know is a pure and simple jobless depression (though of a lesser variety than the Great Depression.
Yes, the housing industry can be a powerful source of job creation (albeit dominated by unskilled and low-wage labor), wealth creation, productivity and thus prosperity. However, and here is the logic, the building and buying of homes and office space is only possible if the economy (read: gross domestic product (GDP)) is driven organically by a widespread production and exchange of goods and services, allowing workers to sustain their shelter over the long term and not just during the virtuous cycle of a recovery. [For more information on the luxury vs. shelter debate, see the October 2010 first tuesday article, Is homeownership a luxury or a necessity?]
Leave real estate in the backseat
When housing is marshaled as the driver of a suffering economy there can be only one avenue to get it there: allowing the maximum number of homebuyers to accumulate mortgage debt at the maximum loan-to-value ratio (LTV). The skillful accumulation of debt can be a good thing for improving one’s standard of living, but as we have seen in the fallout of the Millennium Boom, this debt is all-too-often unsustainable and of a predatory variety.
There are many pushing for the use of the now-latent housing recovery to rev-up and pull us from the murky depths of this economic downturn, especially the all-powerful real estate and mortgage-banker trade unions. This means the fallacious inflation of home sales data, aggressive lobbying for ever-greater homebuyer subsidies and endless cries for lenders to release the perceived death grip they have on cash reserves and start lending boom-time style again. [For more information on the transgressions of the trade union, see the January 2012 first tuesday article, NAR pads the numbers.]
But let us allow this Lesser Depression to work the only magic that it can — a forced return to economic fundamentals, under which a flourishing housing market is an indicator of a healthy economy populated by gainfully employed individuals who can pay for their shelter without subsidy. [For an update on how California is faring in the jobless Lesser Depression, see the December 2011 first tuesday article, Reeling from California’s lack of jobs.]
I disagree. Housing, not just the new home construction part of the industry but housing is the most important word to the recovery from this politically fired disaster.
California was the leader to the top of the hill before we dived into the depths of disparity in which we now muddle.
In the late 1950’s when I was preparing tax returns for a living, i developed a matrix for each client/homeowner to help enhance their path to retirement. Simply put if you doubled principle payment on your home loan each month (if a 30 year amortization) you would pay off your 30 year loan in 6-7 years. The first month of the loan this amounted to about $5 or less at that time. First time homeowner homes in Riverside was inth the $10,000-$15,000 range.
A specific 1956 new 3 bedroom 1 1/2 bath single car attached garage on a 6500 sq ft lot was $9,800. In Mid 2006 that exact home 50 years old but reasonable condition appraised for $290,000.
Because of prop 13 freezing the property tax rate in 1975/76 the property taxes in 2006 were about $480/ year and insurance was about $480 . Now this couple could live out the remainder of their years with $80/month monthly housing cost, plus utilities and maintenance.
Now if the buyer rented this same house on the day they bought it the rent would have started at $900/annum and risen in 2006 to $18,000/ annum. So for the sake of simplicity the gross rental from 1956-2006 would have @ $9450/annum average=$472,500 less( taxes, ins maint and vacancy) of $2,500/ annum=$125,000 leaving a net rental income of $347,500 or $6,950/annum.
The cash down payment on the purchase in 1956 was $1,000 on a VA(GI) 4.5%loan. so that $1,000 investment yielded $6,950/ annum from year one average.
Your home was the best investment anyone could imagine.
You see buying a home or renting one the main cost is the payment for the use of capital which in economic terms is called “rent” .
No better investment. A so called “free lunch” all Californians enjoyed for close to 60 years. You lived in a more secure neighborhood, occupied by homeowners, more attractive, better schools, etc.
because homeowners were more responsible citizens!
The California and National leaders have brainwashed the current generations into believing that they are good homeowners if they let their homes go to hell, occupy without making payments because someone didn’t cross a “t” or dot and “i” when giving them the money to buy the house. Worse than that many refinanced their homes more than once, each time taking out cash and using this tax free money to buy goodies, new cars, new boats, diamonds and just plain goodies they can’t remember.
The home was the security blanket, if anything unforseen happened!
The home was the main security for borrowing capital to start new small business’s.
The home was the main security on all financial statements to finance higher education for their children.
100,000’s of people have been living for nothing and it is hard to go back to a “real” budget because the goverment has taught them that the home they could never have afforded even on the day they signed the loan is their “right” and it was the investor that put up their savings, the retired teachers, etc that were the bad guys. Besides the bank became the supreme Puppetmaster over the banks that serviced (collected the payments) by being forced to accept help and the consequent new controls.
All these now are not qualified to buy, they have ruined their credit
Thats the problem in California with the housing and if California could solve its problem — the National problem would be automatically solved
It is the destruction of the meaning people have of homeownership, intentionally by current governments.