Housing’s Adverse Feedback Loop
When will we see a housing recovery. These words are often spoken about when I meet with homeowners contemplating what they show do, sell or stay? Most homeowners have one of these three issues.
#1 I have some equity in my home. I’m not sure whether right now is the best time to sell. Should I hold on and try to get a little more for my home in six months, a year, or more.
#2 I received a loan modification but it is still not enough to keep my family from sinking into more debt. Should I sell now or is the market going to rebound and I will regain my equity.
#3 I cannot afford my home. I was denied a loan modification. I need to sell my home in a short sale before my lender forecloses. Am I going to sell then regret it later because my house value went up.
The housing recovery as well as the whole economic recovery is a complicated beast. There are many moving parts to the matter and what confuses many is how we see Wall St recovering and big business recovering so small business and real estate should be recovering too, right?
This is the article from The Housing Matrix. It is a great short explanation of the real estate recovery as well as the overall economy recovery.
BANKS/LENDERS
Much of the concern about another housing dip centers on the banks. A sharp house-price decline could lead to more foreclosures, hammering profits and reducing lending, such as it is. Here is a look at just a few factors that contribute to housings Adverse Feedback Loop.
Economist Michelle Meyer identifies an “adverse feedback loop” where:
Lower Home Prices => Tighter Bank Credit => Fewer Jobs => Prolonged Housing Recession
HOME EQUITY
Economists at Bank of America Merrill Lynch say one key to a jobs recovery is an improvement in housing – because so much job creation is driven by new businesses that have in recent years been financed in part by home equity borrowing.
It has been reported that over $1 Trillion in homeowner’s equity has been lost during this past recession, so far. This represents Billions of dollars that are no longer available to small businesses. Whatever the final numbers are this traditional source of financing small businesses has been severely limited creating another adverse feedback loop:
Lower Home Prices => Lower Home Equity => Less Financing Available for Small Business (a key source of financing) => Fewer New Jobs => Prolonged Housing Recession
THE OTHER FACTORS
Truth is that you can create additional adverse feedback loops for Shadow Inventory, Distressed or Foreclosed Housing and you have the same outcome – Prolonged Housing Recession. The feedback loops seem unlimited.
Recently, we hear that an economic recovery will exclude both jobs and housing. While the other economic fundamentals are encouraging it is will be difficult for any sustained economic recovery to exclude the key factor to economic growth over the past 30 years – housing. Housing has and continues to be the primary support to the US economy and very little commerce is not impacted by housing: land, building materials, the trades (jobs), furnishings, appliances and local, state & federal tax revenues, and on and on.
Any genuine economic recovery must include jobs and housing.
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