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The Impact of Unemployment on Real Estate

The current real estate market is much like a Rubik’s cube. Once you think you have it figured out, you look at it from another angle and find out you still don’t have it right. There are many factors complicating the current market. I want to address one of those factors today – UNEMPLOYMENT.

When trying to determine value of any item, we know that there are two components: supply and demand. Let’s look at how unemployment impacts both of these.

DEMAND

It is rather easy to understand the concept that a person without a job will be unable to purchase a house. Therefore, as unemployment rises, more and more potential purchasers are removed from the market resulting in a decrease in demand. How big a decrease?

Let’s look at the severity of unemployment in today’s world. Below is a graph from Google showing the unemployment rate in this country from 1990 to the present:

As you can see, there has been a surge in the last two years. (You can visit here to find the increase in your state).

Historically how does this compare to former recessions? Here is a graph from Calculated Risk that addresses this point:

Bottom line: More and more potential buyers are being removed from the housing market thereby decreasing demand significantly.

SUPPLY

This is perhaps the more troubling consequence of unemployment. The Wall Street Journal in an opinion piece over the weekend discussed the depth of the unemployment issue:

It’s especially distressing to see that the number of long-term jobless—those out of work for 27 weeks or more—jumped again to 6.55 million, and as a share of the total jobless hit a new record of 44.1%, up from 40.9% in February and 24.6% a year earlier. This means that nearly one of every two Americans who have lost his job is waiting at least a half year to get a new one.

How this number compares to previous years is illustrated in the surge at the right in the graph below:

How many of us could afford to continue to pay the mortgage payment if we were out of work for over six months? And that is exactly the problem. More and more families cannot make their house payment. As the Journal reported in an article last week:

More borrowers fall behind as they lose their jobs, especially when they owe more than their homes are worth. Indeed, the surest way to stem foreclosures at this point is to reverse job losses, something the administration likely knows all too well.

A report from Freddie Mac last week shows that job losses drove the vast majority of missed payments last year among prime borrowers, or those who have good credit. Freddie Mac said that 58% of its borrowers who went delinquent last year cited unemployment or reduced income for missing payments.

Bottom Line: While unemployment remains, the number of homes entering foreclosure will increase.

What does this mean to you?

Pricing is about supply and demand. Unemployment is obviously diminishing demand. It also will be increasing the future supply of distressed properties coming to the market at discounted prices. If you are thinking of selling perhaps now is the time. If you are thinking of buying, waiting could be an option as long as you keep your eye on rising interest rates.


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9 replies
  1. Michael Mekler
    Michael Mekler says:

    To the KCM crew, great post.
    It troubles me that we are clearly in times that no one has EVER seen before. The unemployment levels of today are far worse than the numbers during the Great Depression yet it took the mainstream media and the government over a year to call it a “recession”. WHY? On a different note, during the 40’s, local banks forgave entire mortgages for farmers and consumers due to the fact that the cost of going through the foreclosure process was far greater than the amount owed and the inventory was overwhelming. Sounds familiar? Although the remaining of 2010 remains as shaky as the earthquake that we just went through in California, the current unemployment curve looks like there are signs of stabilization and with lenders allowing borrowers to stay in your house for a song I do not believe that this “ghost” inventory will play a major role in the recovery.

    Reply
  2. Steve Harney
    Steve Harney says:

    Michael,

    There is currently a pent-up selling demand in this country.Zillow just completed a survey which showed that 8% of homeowners are ‘very likely’ to put their homes on the market at the first signs of recovery. That equates to over 10 million homes.

    There are between 6-7 million homes either in foreclosure or seriously delinquent in their mortgage payment.

    Help me understand how this won’t “play a major role in the recovery”.

    Steve

    Reply
  3. Michael Mekler
    Michael Mekler says:

    Steve,
    As your team stated so well in the article above, it is all about supply and demand. If Zillow is correct, which they hardly ever are hence all the lawsuits pending against them, the 17 million homes coming to market would once again drop the prices due to the overwhelming supply which in turn will pull the for sale signs off the front yards due to a never ending short sale cycle. Do you really believe that 17 million homes will hit the market at once? I may be very naive but I don’t see that happening. Once again I truly believe that standardizing the state of the real estate market nationwide is not the most accurate assessment. I know that the last 30-40 years have shown that once somebody falls 90 days behind only 1% come back current. I know first hand of a number of people (10+)that were 120 days down and now are completely caught up.
    My only point is that we are going through VERY unusual times and very unusual things are happening every day. Money is extremely tight and lenders know that if they foreclose they will have to carry that home for A VERY LONG TIME. Lenders do not want to become landlords. With the recent announcements to tax heavily the strategic defaults less people will be likely to go that route.
    Based on that I don’t think we should use history as a predictor for the future.
    Michael

    Reply
  4. Steve Harney
    Steve Harney says:

    Michael,
    A couple of points:

    1.) I don’t believe that 17 million homes will hit the market at once (and never said I did). What I have said is that a percentage will come to market. Even if only 15% come to market that is over 6 months supply of inventory. That will impact future values.

    2.) Historically, over 50% of all 90 day delinquencies self cure (not 1%). TODAY that number is 1%. The fact that you know some people who have caught up doesn’t change the data.

    3.) In this blog, we really don’t depend on opinions or anecdotal evidence (I know a guy…). We like facts and conclusions based on research.

    Who is saying that banks are not going to foreclose on all these houses? What will they do with these houses? Just let the borrower live rent free?

    What data supports that less people will ‘walk-away’? All the studies I have read conclude that the number is growing rapidly.

    Though I agree these are different times, there is undeniable evidence that can lead us to cetain conclusions. If we want to debate those conclusions, let’s back up our points with the articles, studies or data that make our case.

    Thanks for your passion!
    Steve

    Reply
  5. Michael Mekler
    Michael Mekler says:

    Steve,
    I love you and you know it. I love having these discussions with passionate and intense people. It definitely makes you think. Isn’t that what social media is all about??
    All in all my main goal is to keep a positive thought and maybe I do that to a fault sometimes.
    I look forward to you making your next West Coast tour so I can talk to another New Yorker. Come by my blog sometime.
    All the best.
    Michael

    Reply
  6. Michael Mekler
    Michael Mekler says:

    Steve,
    I tried really hard but I can’t let go of one point. I appreciate your point 3. The fact that you only go on “factual data”. As I may have shared with you before I spent 15 years in the pharmaceutical business. All I had to go by were studies. At the very bottom of almost every study the disclaimer “This study was made possible thanks to a grant from….”. I left the business because I learned rather quickly that even the NIH (National Institute Of Health) received grants for double blind placebo controlled studies and I spent every waking hour hanging on to that data. I learned rather quickly that data gets manipulated to the benefit of the institution paying for that study. Take for example the case of the drug Thalidomide. Since the manufacturer claimed the drug was safe It was prescribed then like crazy to almost every pregnant woman in the world. Of course 9 months later the incidences of Phocomilia, a condition by which babies were born with no legs or arms, grew like crazy.
    I have not been in this business as long as you have but there is only one set of data that I respect and that is the Case Schiller Report. By this report standards the Real Estate market seems to be stabilizing. I am sorry but I can’t take the data from Zillow seriously. They only care about one thing and that is the bottom line. One could argue that this data was manipulated to benefit the agents so the on the fence seller will take action. The feeling of fear is very powerful.
    Michael Mekler

    Reply
  7. Leslie
    Leslie says:

    Well, gentlemen, perhaps that the market is “stabilizing”, but this means nothing more than what the famous economist Ronald Reagan so famously quipped in the early 1980’s “the rate of decline is decreasing”. Mr. Mekler, Zestimates are just plain silly, but so are most Realtor CMAs. Most of their data is simple repsrting of inventory and sales.

    The amount of inventory is simply staggering, at all price points. One internal BofA report says that they have 1,000,000 short sale applications in-house. 1,000,000! The inventory versus rate of sales (absorption rate) increases dramatically as you move up the price ladder.

    Please understand, I am a day-to-day participant in this market and considered a successful Realtor. I work for the largest (and relatively well off broker) in northern Illinois. I am in the top 1% of our folks today. I spend most of my time in either grief counseling (so sorry about the offer) or in talking people out of listing their home. I really wish Steven Baird would give me a dollar for every house I keep off the market. At the mid-upper end of our market in our relatively affluent suburbs the INVENTORY IS MORE THAN 20 YEARS. I spent last year writing in my weekly reports “At the current rate of sales, your house will never sell”. Now I just don’t take the listings unless they are compellingly and competitively priced. When a $1,000,000 house finally sells, you can bet it started up near $2,000,000.

    So back to “what data do we use”? I would suggest, “all of it” and keep sifting it and sorting it. Most important number is probably absorption rate, but it has to be carefully defined and used in a relevant fashion: rate of closed sales to new listings, source of new listings (traditional or distressed), increase of % of closed non-arms length transactions (ss, forclosure, reo, relo, estate, etc). In regular, otherwise previously well-regarded mid-level subdivisions, 70-80% of all closed transactions are not traditional sales. The buyers are driven to the deals, and those are the foreclosures, ss, and relos. Only once in a while does a seller just “get it” and sell at a market-based price, but only when he already has a significant equity position in the home. Due to the run up of exotics in 2004-2007, many people who want to sell, can’t sell.

    I am pretty concerned about the final comment “data is manipulated to benefit the agents…”. Huh? Numbers are numbers. In traditional economic parlance, a home purchase is a unique convergence of economic self-interest with personal desire. Very few of today’s buyers can be manipulated off the fence, drum-beating of the NAR notwithstanding.

    Phew. I just wrote a whole blog post. Wonder where it came from tonight? Sorry to use your space for it. Maybe I’ll rework this and post at foxvalleyrealestate.info.

    Reply
  8. Michael Mekler
    Michael Mekler says:

    Leslie,
    I absolutely love your post and I used to work for Abbott Labs. I believe Northbrook is East from where you are. I am only writing this to clarify the “manipulation of the data for the agent” statement. Zillow has mislead the consumer,perhaps not intentionally, for years with completely erroneous home values. I can’t place any validity to any data released by them. That is all.
    Michael

    Reply

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