Keep an Eye on Housing

Ben Bernanke has rescued the economy at the present from another Great Depression. In fact, it appears by technical indications that we'll be out of the Severe Recession this 3Q of 2009. So what's that mean? Recent history for those of us under 45 are familiar with one type of recession - a kinda bad one where the economy, markets and employment quickly ramp back up.

This one just wont be the same. And thats the strong consensus thought of most all economists. Why? Consider that consumer spending and thus consumer wealth drive our economy. Now consider the two main sources to that consumer spending and wealth: (1) homes and the equity built up in them; and (2) income from jobs.

While businesses have cut costs and learned to secure profits (albeit at the expense of some employees) and while the government has secured and stabilized the financial system from crashing or people making a "run on the banks" (al-la, 1929), the foundation of the economy faces major major hurdles moving forward. Mainly that neither housing nor unemployment are expected to improve much throughout all of 2010. If people dont have jobs they lose their house. If they lose their house, home prices in general tend to decline. Those that have homes have less equity in them, so they have less wealth as a result. Its a horrible conundrum really. One that won't break our economy but one that will require government sustaining (i.e. debt) and one that will severely stunt growth options in the next 2 years.

Consider the following thoughts:
(1) 50% of all homes will be under-water (worth less than was paid for them) by mid-2010. You might not think this is you...but consider that home prices are STILL FALLING and likely to continue to fall, especially absent additional government tax credits. National average is that if you bought a home in August 2008, then your home value has decreased by 10% as of August 2009. Do keep in mind that that's a national average and real estate is local. For example, Boston is flat in a similar year-over-year comparison.

(2) The glut of foreclosed houses is huge (which hurts all surrounding home prices) and there is a backlog of inventory of foreclosure owned by the banks. Foreclosures will continue to have a measurable effect on housing through mid-2010.

(3) Unemployment is STILL RISING and expected to rise into early 2010. After that, its not expected to improve very much or very quickly. An "improvement" to an unemployment level of only 8% would be huge but that's still the peak of the previous recession's unemployment level. All this means less home buyers and potentially more foreclosures.

(4) For housing to appreciate in value you need private investment and risk taking -- government can stabilize via tax credits but that's not sustainable. If it was then that means it'd be a permanent government program. Given the aforementioned and expected environment throughout 2010, it doesn't sound like there will be significant amount of private investors with capital or private investors dying to take risks without much promise of a strong return (its estimated that starting in 2011, home prices/values will appreciate at a level of 3%, meaning you should be buying a home with the intention of being in it for 7+ years, not jumping ship every 2 or 3 years.)