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Job Creation: Only Solution for a Housing Recovery

The government has tried many stimulus programs to re-energize housing.  They attempted to kick-start demand by offering the First Time Home Buyers Tax Credit and they did have some success originally. They extended the program and added a provision for move-up buyers also. Even the government admits that the extension may not have increased demand but instead just moved it forward. In any case, demand has fallen off dramatically since the expiration of the program April 30, 2010.

The FED also tried to entice buyers to the market by keeping interest rates low with their program of buying mortgage-backed-securities. This coupled with the tax credit gave the real estate market some life in the first four months of the year. Rates have remained low and many have refinanced but purchase applications (mortgages for people buying homes) have plummeted.

The supply of distressed properties has increased substantially despite government efforts to help people avoid foreclosure through loan modifications. Only one in ten people determined to be in need have been given a permanent modification. A new study shows that 55-75% of those who have received modifications will re-default.

We can see that the initiatives to boost demand and curtail supply have not been successful.

Many are now coming to the conclusion that only one thing can turn housing around: the creation of jobs.

Harvard’s Joint Center for Housing Studies clearly defines the challenge in their State of the Nation’s Housing 2010 report released this month. The report explains the importance of sustained job growth to the future health of the housing industry:

Even as the worst housing market correction in more than 60 years appeared to turn a corner in 2009, the fallout from sharply lower home prices and high unemployment continued. By year’s end, about one in seven homeowners owed more on their mortgages than their homes were worth, seriously delinquent loans were at record highs, and foreclosures exceeded two million. Meanwhile, the share of households spending more than half their incomes on housing was poised to reach new heights as incomes slid. The strength of job growth is now key to how quickly loan distress subsides and how fully housing markets recover.

The study went on to explain that jobs are more important to a housing recovery than are lower interest rates (see chart).

One of the biggest drags on the housing market is the high joblessness rate. With more than 7.8 million fewer establishment jobs than in December 2007, unemployment held at 9.9 percent in April 2010. If the past is any guide, the strength and sustainability of the housing recovery will depend most on the bounceback in employment growth.

Unfortunately, most economists predict that the unemployment rate will remain elevated as discouraged workers reenter the labor force amid slow gains in jobs.

 We can see that the housing market won’t return to health before the job market does. How is the government doing on this front?

The Wall Street Journal in an article last week titled Housing Revival Is Built on Real Jobs Growth reported:

So what is the real housing antidote? The creation of permanent, private-sector jobs. But that isn’t what the economy has delivered this year. Of nearly a million jobs created in 2010, more than half have been Census spots. And in May, a paltry private-sector employment gain of 41,000 included the creation of 31,000 temporary jobs.

These short-term spots, analysts at CreditSights said in a report last week, don’t “provide the security necessary to take on large purchases, such as a home, or even foster a greater chance of being approved on loan applications.”

So while the government has been able to stabilize housing, anything short of real jobs growth won’t allow the market to thrive.

What does this mean to you?

Prices will continue to soften based on an increase of supply with limited, or perhaps no, increase in demand until the jobs picture starts to improve.

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2 replies
  1. Alex Cortez
    Alex Cortez says:

    Great info, Steve. Many experts fail to take unemployment rates in their forecasts of the real estate market, which is like cooking a cake without flour (sure, you’ll have something but it won’t have much substance). Found your blog on Inman, I’ll definitely be subscribing.


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