Thursday, February 17, 2011

Strong Correlation
I am not an economist, but I read plenty of economic articles.  It doesn't take an economist to connect the strong relationship between housing and the unemployment rate. When the housing market was booming unemployment dipped below 5%.  When the housing market tanked unemployment rose.  Now the housing market and the employment market are both stagnant.  I believe that unemployment will stay high until the housing market rebounds, which means a significant increase in new home sales and housing starts.  (Note that the housing figures released yesterday showed a 14% increase in housing starts in January over December, but all the growth was in multifamily units, and single family starts actually declined 1%, and are at their lowest level in two years.)  I recently read two articles that tie my theory together.

Here is an article on the "new normal" unemployment rate, which one economist estimates is 6.7%.  I don't doubt this number, as all the jobs related to housing bubble, such as in construction, real estate sales, design, and finance (how many people do you know who are former mortgage brokers or real estate agents?) will not rebound to the levels seen during the boom.  I think that the housing boom was responsible for dropping the unemployment rates down from 6% to under 5%. 

Here is a second article from yesterday's Wall Street Journal (no subscription required) on how banks now require more equity for homeowners.  Here are a few paragraphs and a graph from the article:
The median down payment in nine major U.S. cities rose to 22% last year on properties purchased through conventional mortgages, according to an analysis for The Wall Street Journal by real-estate portal Zillow.com. That percentage doubled in three years and represents the highest median down payment since the data were first tracked in 1997.
[MORECASH1] 
The move to force home buyers to lay out more cash is driven mostly by banks, who have found that larger down payments discourage delinquencies by increasing the buyers' exposure to loss and reducing the impact of declining prices. Many home buyers placed little, if anything, down during the boom.
Keeping otherwise qualified and willing borrowers on the sidelines makes no sense to me.  I am not advocating going back to the crazy mortgages of the mid-2000s, but the swing of the pendulum, 22% down payment and strict credit guidelines, has gone too far.  Easing credit in a sensible manner will help the housing market.  It will help eliminate excess supply, and hopefully start a sustained increase in home values.  Existing homeowners (and banks!) will benefit from increased values.

Real estate has always been finance driven, the more money available, the more people will buy homes.  The demand for homes is there, banks just have to meet it.  Homeowners need equity in a home, or they will treat the home like a rental, which is what happened during the housing bubble. Having a financial stake in home is vital, but current draconian terms are going to prolong the housing mess.  Lending policies that make home ownership easier should drop unemployment.  Without a prudent easing of home lending credit terms the housing market will stay in its current bog and unemployment won't drop to its "new natural" level.

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