Yesterday I told you about the stability of a few of the nation’s finest cities, including Washington DC, Los Angeles, and Austin, Texas. I said that these cities have remained relatively stable throughout the whole economic crisis, mainly because of the low unemployment rates in these areas caused by the high proportion of government jobs that each of these cities offer. Well, apparently, that won’t be enough to stop a steep drop in home prices.
According to Fiserv, a financial services company, home prices in the greater Washington area are expected to drop by 15 percent from the third quarter of 2009 to the third quarter of this year, and then are expected to rise by 8.4 percent between then and the third quarter of 2011. This pattern is expected to be constant throughout many of the country’s premier cities, such as San Diego and Los Angeles.
Reasons behind this expected periodic dip in home prices are, as of now, still unclear. There is no reason that the sip is logical, and we await an explanation by Fiserv as to why this will be happening. Perhaps the dip is due to the homebuyer tax credit that is expected to expire in April. Perhaps the expiration of this tax credit will cause a decrease in home buying, which would then cause prices to drop. This is simply speculation, though. Whatever the reason, this is not great news.
Unexpected Dip
Leading by Example
Many major cities, including Boston, Los Angeles, Austin, and others, are fairing relatively well in the volatile real estate climate. However, no city has fared better than one very familiar city- Washington, DC.
Washington was not hit as hard as many cities when the economy crashed a couple years ago. And the damage that was done has been contained relatively well, in part because of the extremely low unemployment rates. In Washington, unemployment rates are lower than anywhere else in the country, hovering at just above 6 percent. Why is this? Because the nature of jobs in the nation’s capital are not very susceptible to economic downturns. Many jobs offered in the nation’s capital are government-based, and these jobs will not disappear just because of a recession; they are there to stay. Cities across the nation which have many government jobs are relatively well off at this time.
Because of the low unemployment rates, other areas of the local economy have been almost unaffected by the recent crash. I’m talking about dropping home prices. While home prices have plummeted in most areas of the country, places like Washington DC have stood tall in the face of tragedy. Places like Austin, Texas have followed suit.
The good news is that there are some cities that we can look to as pinnacles of hope during these troubling times. Maybe we can learn from these places, and take what they are doing and apply it to the cities that we need to recover. Because the best way to lead is by example.
Credit Scores
A person’s credit score is vital in this economy. In fact, a credit score is vital regardless of the economy. A person’s credit score is important as far as getting a job, getting a house, etc. The problem is, in this economy, it is extremely difficult to maintain a good credit score.
It seems to be a never-ending cycle; if you miss so much as a single mortgage payment, it can negatively affect your credit score. If you have a lower credit score, you will likely not be able to find a job, which would lead to you not paying your mortgage on time. It is quite the puzzle. To qualify for a loan from Freddie Mac or Fannie Mae, you usually need a base credit score of at least 620.
Even if you have done nothing wrong, you are still at risk for a credit score drop. Credit card companies are often lowering their limits due to the recent economic activity, and some unsuspecting credit card owners are getting caught. Thirteen percent of people surveyed reported that their credit card companies had lowered their limits in the last few months.
This just goes to show you; everything is connected. The economy and the real estate industry are joined at the hip. Credit scores are a vital part of Americans’ everyday lives, and these scores are being jeopardized by the fluctuating real estate market.
The Damage is Done
It’s no secret: the real estate market is bad. Levels of unemployment are up, home sales are down, construction is down, foreclosures are up, and you get the picture. However, this recession may have a lasting impact on not only the economy but on individual consumers as well.
Credit scores are, undeniably, extremely important. Without good credit scores, one can find themselves out of a job, or, even worse, homeless. Banks won’t deal with people who have terrible credit scores. That is bad news for about half of Americans. According to statistics, almost half of all Americans have missed at least one mortgage payment during the time of the recession. But what harm is missing one payment? Sure, the repercussions are more severe if your home is foreclosed, but missing even one payment can damage one’s credit score as well.
Even after the economy recovers, individuals likely will not, which will pose a major problem in the near future. Lenders won’t give many Americans the time of day, especially the ones who have lost their homes to foreclosure. In addition, one’s credit score can also be negatively affected by missing a car payment or even a credit card payment. So, a shortage of money, which most Americans find is the case for them, will make it difficult to avoid getting a damaged credit score. There is not much that can be done about this issue now; we just have to hope that the market recovers before much more damage is done.
The Only Way
Construction spending is, as we all know, a good indicator of how the market is doing and how well it is projected to do in the near future. Judging from that analysis, we aren’t looking so good. For the third straight month, new home construction dropped.
Home construction rates are now at their lowest rates since 2003. After a 1.2 percent drop in home construction in the month of December, construction dropped again my 0.6 percent in January. The reasons for this are many. First of all, builders obviously do not have as much confidence in the market as is ideal. And why should they? Consumer confidence is low, and many key economic indicators are down.
Another interesting note is that the demand for homes has gone dangerously low. These two figures are obviously related, and conventional wisdom holds that the construction levels should be affected by the demand, not the other way around. Since consumer demand is low, there is no real reason to be building tons of houses right now. So, given this logic, there is no real reason to panic about these low construction numbers. What we do have to be concerned about are the numbers for consumer interest.
It is the consumer interest that drives virtually everything in the real estate market. That being said, the only way for us to recover from this depression is if an increased number of buyers show interest. That is the only way.
New Records
The buffeted housing market continues to experience new lows, even a year after the supposed “rock bottom” was supposed to have occurred. Home sales are down. Big time. But nothing has suffered as much as the sales of new homes. Although sales of existing homes are still down, those numbers are nothing compared to what has been happening with new homes. At first glance, the numbers don’t look cataclysmic- sales fell by 11.2 percent in January. However, when compared to those same numbers a year ago, the results are staggering; new home sales are 6.1 percent lower now than they were a year ago, when times were really bad.
For the first time in three years, the number of new homes that are on the market rose. That is bad. That means that homes are sitting on the market and starting to pile up. What does this mean for the housing market? Well, if these homes aren’t cleared out, then simple principles of supply and demand will be our downfall. The more homes that build up, the less expensive that they become, which is bad for the market. We cannot afford to go backwards.
Mike Larson, an analyst at Weiss Research, puts it best. “No sugarcoating these numbers. They stink,” he wrote in a letter to his clients. These numbers are both surprising and troubling. It’s just another problem that we have to figure out how to fix.
The Big Question
Special tax credits, government programs, and the list goes on. We have tried dozens of things to try and cover up the real problem, hoping in succession that each of these solutions may actually help the market. So far, we have received little more than temporary relief, and now the problems are back and better (or worse) than ever. Perhaps it is time that we got to the root of the problem.
I’m talking, of course, about unemployment. As hard as we have tried to find a solution to the problems that have resulted from this high unemployment rate, there seems to be nothing that we can do to cover it up any longer; we need to find a way to fix the problem itself instead of trying to cover it up.
Of course, the reason why we have been trying to cover up this problem is because it is so difficult to fix. As Roberton Williams, senior fellow at the Tax Policy Center, puts it, “You’ve got a really big problem that requires big guns, and the tax credit is just not big enough.” We have no choice now but to find a solution to the age-old question of how to solve the unemployment problem.
For some, this problem may seem like it doesn’t have a clear-cut answer. It may seem like we’re asking “How big is the universe?” But really, there must be some answer to this question; we just have yet to find it.
Removing the Viel
Remember when the sales figures for December came in? Remember when everybody panicked, because sales had plummeted by more than 16 percent? Remember when I said that it was probably just an anomaly? Well, I guess we’re all wrong sometimes.
The sales report for the month of January has just come in, and the results are astounding. And not in a good way. Sales of existing homes decreased again, this time by a margin of 7.2 percent. With the recent decline in this area, sales of existing homes are down to their lowest levels since summer. This is not good news for a public who thought that December was just an anomaly, and who fully expected sales to increase again come January.
Not only did nobody expect for this to happen, but it may be a view into the reality that we have not been able to see over the past year. Stimulus programs have certainly helped the market over the past year, but maybe only artificially. Now, one expert says, we are looking at what the true market is like. It is a quite humbling experience.
Over the past year, all of us have been under the illusion that we were getting better, that the market was on the upswing. Now, we see the real picture. How do we respond to this crisis? By buying. Don’t hesitate to buy a home; conditions are extremely favorable for buyers right now. That is the only way that we can see true results.
Wake-Up Call
American homeowners in all walks of life have been severely impacted by the real estate crisis. As the American economy crashed and unemployment rates rose sky-high, homeowners were suddenly unable to afford their mortgage payments and foreclosures rose to unimaginable levels. Although almost every asset of the American economy has been touched by this crisis, there is one industry that has stood tall in the face of adversity; commercial real estate.
Despite all of the problems that homeowners have been having for the past three years, commercial real estate has been relatively untouchable. The case can be made that the hotels, buildings, and businesses that have stood strong during these difficult times are the main reasons why the American economy isn’t completely trashed.
Well, I hate to break it to you, but commercial real estate is due for a depression. Elizabeth Warren, chairman of the Congressional Oversight Panel, perhaps says it best. “There’s been an enormous bubble in commercial real estate, and it has to come down,” she claims. I agree. What is the reason for this? One of the main reasons why commercial real estate is due for a letdown is because almost half of the country’s banking system is comprised of banks that have a high proportion of real estate loans compared to the amount of capital they have. In short, this means that the more money the banks have in real estate loans, the less money they have for consumers, especially at a time when much of that real estate money has been lost.
With the good news that has been coming out of the real estate market recently, this one is a bit of a shocker. Hopefully, the commercial sector can last long enough for foreclosures to diminish.
The Light
Foreclosure. Simply reading the word probably caused you to shiver just now. Don’t feel bad; you’re not alone. When you look at what the word “foreclosure” has meant in recent months, you are bound to shiver. During the past three years, we have seen foreclosures grip the real estate market. Last year, in 2009, we saw foreclosures jump to record levels. The President and his cabinet have done all in their power to help quell the crisis at hand, and, for once, it seems like the President’s actions may have done something.
Something happened recently that had not happened in almost three years. Three years. What was it that happened? Foreclosures decreased. Yes, for the first time in almost three years, it appears as if we can see the light at the end of the tunnel. Things have been bleak, but we will eventually climb out of the hole of despair that the economic crisis has put us in.
However, we are not quite out of the woods yet. Just like a porcupine that didn’t see its shadow, we are still in for some cold weather before spring comes. Granted, knowing that spring is, in fact, coming will make the cold weather that much easier to bear. Mike Larson, a prominent real estate analyst, said that the road to recovery is “going to be a very long, gradual process.” Granted, we should still be excited about the good news, we still have a ways to go.
