Economic Highlights of the Past Week
*22.5% of all U.S. homes (nearly 11 million properties) are still underwater, down from 24% a year ago. Nevada at 60% and Arizona at 49% are the “leaders” (9/13/11 Housing Wire)
* FHFA, regulator of Fannie Mae and Freddie Mac, is considering whether to allow refinancing in excess of 125% (9/12/11 Mortgage Daily)
* Fitch downgraded several homebuilders, including knocking KB Home from B+ to BB- (9/12/11 Housing Wire)
* Mortgage servicers started the foreclosure process on 78,800 properties in August, up 33% from the month before but 18% below the previous August, just before the robo-signing scandal (9/14/11 Housing Wire)
* The income of the typical American family is roughly where it was in 1996, adjusted for inflation (9/14/11 WSJ)
* Retail sales in the U.S. were flat in August (9/15/11 WSJ)
* A record 46.2 million Americans are below the poverty line (9/13/11 MarketWatch)
* Unemployment-benefit applications rose to 428,000 (9/15/11 MarketWatch)
Two articles in the Wall Street Journal (9/13/11) earlier this week highlighted the severity of the economic and unemployment situation in the U.S., how the government continually demonstrates its ineptness, and the country’s lack of a cure for its current ills. Although these stories may at first seem to be interesting abstractions for real estate investors, they actually point out current and future problems for the industry.
The first article, titled “Student-Loan Defaults on the Rise,” noted that default rates on student loans are up sharply in recent years. As of September 30, 2010, 8.8% of federal student loans whose payments began coming due during the previous fiscal year were in default. Pew Research found that most of the problem comes from for-profit colleges, which represent only 9% of all students but 25% of Federal Pell grants and loans, and 44% of all student loan defaults.
A study by Rutgers University found that only 53% of students who graduated between 2006 and 2010 had full-time jobs. This ties closely to an article that I wrote last June citing research showing 22% of 2010 grads are unemployed and 22% work in jobs that don’t require a college degree. Current high-school students apparently are not getting smarter than their older peers. A 9/15/11 WSJ piece tells of how SAT reading and writing scores hit a low for the 2011 graduating class, with only 43% of students being ready for college. When most of the younger segment of our adult population carries large student loan balances and cannot get well-paying jobs, this has a dramatic impact on sales of starter homes.
A 9/13/11 WSJ opinion piece by James Bovard reflected on how federal government job training has been an utter failure. He noted that between 1961 and 1980, the Feds spent tens of billions of dollars on federal job training and employment programs without keeping any meaningful statistics. A 1982 job training act called JTPA went beyond a waste of money, as the young trainees were twice as likely to be on food stamps after the program as before, partly because the training included a section on applying for government benefits. A 1993 study of JTPA found that those who participated in the training had 10% lower earnings than a control group. By the way, the Georgia Work$ program that the current administration wants to emulate has produced less than 200 jobs this year.
What does this mean for real estate? From an education standpoint, it means that weaker performing students will be going to college, and that current and future college grads are less likely to have good-paying jobs that would allow them to buy a house. Young adults with little or no income won’t be able to get a home loan, and couldn’t pay it back if they did.
For those who don’t go to college, government training programs are not the answer. They run up huge taxpayer bills without any meaningful skills being developed. These folks won’t be buying a house either.
The lack of income for younger adults also affects older generations. People who currently own a small house and want something bigger to accommodate a growing family will have more trouble selling their old house. This impact carries right up the chain to all but the most expensive houses. Of course, the lack of home sales naturally affects the livelihood of realtors, banks, appraisers, and everyone else tied in with these types of transactions.
In my view, the short-term prospects for real estate in general are bleak. If the government would stop meddling, then home prices could go to a more natural level (still lower than today) and recover over the medium and long terms.