Where Is Housing Going? Why Does It Matter?
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.