A bit of good news this week:
* The Wall St. Journal (11/3/2011) reported that “the nation’s seasonally adjusted home-ownership rate stood at 66.1% in the third quarter, up slightly from 66% in the prior quarter” and “suggesting a three-year decline in home ownership may be starting to bottom out.”
* Consumer bankruptcy filings fell in October for the fourth straight month (WSJ, 11/3/2011)
Awww, but what’s this:
* October home prices were down 3%, which means 13 straight months of year-over-year declines, as the flow of distressed properties continues
* The average student loan balance for 2010 college graduates was just over $25K (WSJ, 11/3/2011). They won’t be buying a house anytime soon … or even renting one unless they can find good jobs
* Freddie Mac lost $4.4 billion in Q3, drawing another $6 billion from Treasury funds
Oh yeah, Ben Bernanke and his pals at the Fed discovered what everyone else already knew, namely that unemployment will remain high and economic growth low for several more years regardless of what fiscal knobs and switches that the Fed fiddles with. Someone there apparently feels that the $1.25 trillion in purchases of mortgage backed securities was money well spent, so they are considering buying more.
Economic events and government shenanigans that I read about each week only reinforce the predictions that I made last week. However, I did enjoy reading the responses to that article. Some savvy investors are clearly able to take advantage of hidden opportunities to increase their wealth. Others expect a quicker economic recovery. Let’s drill down on two major issues affecting the real estate market – jobs and the U.S. debt.
Obviously, people without jobs or those making just enough to get by clearly cannot buy houses. Even people who want to move up to larger houses because of expanding families or for other reasons often are unable to do so, either because they cannot afford it or because they can’t sell their old house.
The U.S. job market seems to be going through a milestone transition. Over the past century, America went from having over 1/3 of its jobs in farming to just 2% today. Most of the difference went to manufacturing. More recently, as technology allowed for fewer employees to do the same amount of work and as lower-cost countries took over much of the remaining work, manufacturing has become a smaller part of U.S. GDP. The U.S. successfully transitioned from being primarily agricultural to primarily manufacturing-based, but it is not clear what the next phase will be. So called “green jobs” don’t seem to be the answer, so the middle-class and below will continue to struggle to raise their average wages.
On the debt side, U.S. spending is out of control. In the early years of our nation, the U.S. ran surpluses almost every year. There were sharp increases in debt during times of war (from the War of 1812 through WW II), but generally the country paid back these debts and was fiscally prudent. Then, from 1965 on, U.S. aggregate debt grew faster than GDP. When President Nixon took us off of the gold standard, it completely loosened the ties between the U.S. dollar and anything of value. Since 2003, the debt has increased by at least $500 billion every year, with deficits of over $1 trillion during the past three years. U.S. debt is now approximately equal to annual GDP at $15 trillion, the largest in the world.
Interest payments on the debt totaled $414 billion in fiscal 2010, and would have been higher if not for low interest rates. Imagine how many ways that money could have been spent on a better social safety net or to improve our infrastructure! About half of that $414 billion goes to foreign countries like China and Japan, so it is gone forever.
This affects real estate in many ways. Interest rates will go up and inflation will kick in within the next 3-4 years (in my opinion), which will further reduce the pool of potential buyers. The number of buyers will shrink further if the government does away with the mortgage interest deduction either fully or in part, as has been recommended by several deficit commissions. Generally confidence will wither away for many otherwise strong buyers. One analogy I like is that having the large debt is like driving the economy with the emergency brake on. Real estate and the general economy are least temporarily joined at the hip, and the road ahead looks bumpy.