The Housing Market Woes: How Are They Stalling the Recovery?

The housing market does not exist in a vacuum. It has always been connected — albeit not too strongly — to certain long-term macroeconomic trends, such as employment, for example. Nevertheless, the relationship has always been positively correlated. When more people have jobs, home prices tend to increase, because new household units are created more easily, all needing roofs over their heads. Of course, it all ties into the overall economy, because, as the economy grows and both individual and corporate earnings improve, the real estate market typically prospers.

Unfortunately, the reverse is also true, at least if the unemployment downtrend persists over more than just a few months. When people lose jobs, home prices decrease, because the demand is taken out of the equation. And, if the job loss is not stopped for more than a year, a percentage of those who lose their homes to bankruptcies and foreclosures increases to the critical point where there are more sellers than buyers, pushing home prices sharply down.

Many developed economies have gone through housing bubbles and housing busts. However, what is going on now is something much more dangerous. What we are about to experience is a prolonged down-spiral effect that might be irreparable.

I believe by now that it is clear that the recovery has stalled because it appears more fundamental economic weakness is ahead of us. While in the past couple of months, the U.S. economy has generated new jobs, there is something else to consider. By the end of the 2010 Census, the economy will have to endure the impact of an estimated 1.2 million lost jobs during the second half of this year. Even if not a single job is lost from June to December of this year, just to achieve the positive zero on the job creation front, the private sector would have to create on average 200,000 jobs per month (1.2 million/6 = 200,000) by December 31, 2010.

The rigid 200,000 job creation rate per month appears unsustainable. If the private sector falls short, which at this point seems highly likely, the economy will continue losing jobs and unemployment will continue to rise. Add the Gulf of Mexico oil disaster to the already dismal job situation, and we have a recipe for disastrous job losses on our hands. Although some temporary job creation may be associated with clean-up efforts, in the long term, the region is still very likely to suffer through huge unemployment rates for who knows how long.

How does unemployment tie in with the housing market? First, to qualify for a mortgage, a homebuyer must have a job. Second, that job should be sufficient to pay for a mortgage. If either or both of these requirements are not met, the homebuyer will not get the loan to buy his or her dream home. Additionally, if someone who already has a mortgage loses their job or if it suddenly does not pay enough, they will lose their house to foreclosure.

Furthermore, as fewer people are able to qualify or keep their mortgages, more houses remain unsold on the market, thus increasing the supply. As the supply rises, the demand for reasons already explained dwindles. Lower demand also means lower prices, as sellers become desperate and agree to sell homes below market value just to get out of their mortgages.

The erosion of employment and housing leads also to certain intangible “psycho-economic” consequences, as I call them. In the current environment of falling prices, it is good news when mortgages are at or near parity in value with the underlying home values. But, as the down-spiral effect gains momentum, we are seeing many homeowners struggle with owing more on their mortgages than equity owned in their homes. It is depressing to realize that one day you were wealthy and the next you’re thousands of dollars in the hole. Being perceived as poorer erodes consumer confidence and, eventually, it adversely impacts the country’s spending rate, slowing down an economic cycle in the process.

How can we stop this downward-spiral effect? This is easier to answer than it is to put into practice. The only way to stop the downward-spiral effect is to create more jobs that pay good money. Statistics shows that the sustainable job creation in the U.S. will start somewhere around two million new jobs in the private sector, not government, every year. That is the absolute bottom level needed to accommodate the overall population growth, as well as new people searching for jobs.

How long until we get there? At this point, it is anyone’s guess. We could be talking about a year, two years, perhaps longer. But, more importantly, it is not just the number that has to be achieved. For the job market to produce more income and for the housing market to heal, both will have to recover at approximately the same pace and cognizant of each other. Maintaining a positive correlation between the job and housing market has never been more important than it is now.