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Where Is Housing Going? Why Does It Matter?

13 June 2011 6 Comments

Housing numbers have weakened in recent weeks and months (from an already weakened state).  Most homeowners now are numb to the fact that they’re getting killed on their home values and it only gets worse.  I believe that housing will drop likely another 5-20% from current levels, but possibly even more demoralizing is that I think it might take place over a span of 2-4 years.  Such a prolonged period of decline is definitely hard to stomach for most homeowners.

I’d like to discuss whether or not it matters.  The answer is a resounding yes and here’s why…

First, home values indeed impact the homeowners.  Perhaps more than anything it is psychological.  Why did consumer spending go up so much when home values were up?  It wasn’t just because people were actually locking in profits from housing transactions.  Instead, it was more of the psychology at work.  The reality is that people felt wealthy and therefore were willing to spend.

Similarly, people are not spending because they are feeling more and more poor as a result of the housing bust.  The last glimmers of hope for the American consumer unfortunately are in the fact that millions are living (squating) in their homes and not paying their mortgages anymore.  They’ve opted to continue a lifestyle rather than pay their mortgage.  Anyone banking on this as a sustainable way to continue a consumption-based economy is sadly mistaken.  This too will come to an end.

Next, the other way a housing decline impacts the economy significantly is the lack of funding for small business.  Huh?  A great deal of entrepreneurs over the years have funded entrepreneurial activity through home equity lines of credit.  These forms of credit have dried up significantly because of stricter lending standards and a lack of equity in homes (most people are underwater).

The media and public who understand very little about how the economy works continues to blast banks for “not lending.”  The reality is that banks rarely lend to entrepreneurs even in good times.  Businesses usually start up by home equity loans or savings or a loan from a family member.  So while corporate America is flush with cash, small businesses are struggling to find capital.  Since most job creation comes from small business, this is very much a reason why corporate profits are up yet job growth continues to be stagnant.

So, unfortunately housing is a major catalyst of the economy, and thus a few more years of declines in home values doesn’t bode well for a recovery.


  • Danielhendr said:

    Sometimes I think there is traffic out there if your house is priced right. I had a friend who just sold there house for 206,000 and she averaged around 3-4 showings a day for two months. She thought maybe she put the house up too high but ended up only getting one offer and she was in a rush to sell. The issue is people are underwater since no down payments, home equity loans, etc have caused people to put their home on the market at an inflated value where it just sits along side the empty foreclosure homes. People buying today are looking for deals or not interested which is really hurting market.

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  • Renee said:

    We bought a home in 2008 for $135,000. We owe $116,000 on the home currently and it is worth $49,000 according to Zillow. To say it hurts me psychologically is an understatement. But "they" say those losses would only be realized if I sold today. Which isn't even an option because I can't bring that $67K to the closing table. So, I guess I'll keep plugging along and I'll know better next time.

  • Valentine_505 said:

    It depends on exactly where you are looking. Here in downtown Indy, they have not bottomed out. Nothing much is selling downtown no matter what you price it at. The issue is the lack of young professionals looking downtown and the amount of down payment they now need. Few foreclosures here. What few sales take place are often full cash sales. In the suburbs, it depends on the $$ amount of subdivision. Some of the more desireable ones with great schools are pretty stable. We still have a lot of families looking for housing in the great school districts. In some lower income subdivisions or the areas hit hard with foreclosures, bottom has not been hit. Even Habitat for Housing is having issues with finding qualified buyers. Strange but true and they had to repossess some homes last year. I cannot say what is happening yet in AZ or NV or places like Cleveland. It really matters whether there are families or others with the income to buy and jobs to support them. So look to the unemployment rate in your specific area. If still really high, the demand for housing may still be low and foreclosures continue. http://cashadvancesus.com/foreclosure-rates-decli

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