Housing: Still a Bubble?
Real estate values may have a long way to fall. While the stimulus had done a lot to prop up asset prices across the economy, real estate’s buoyancy is driven by its own activity. That means that there is good chance that we will see less demand for real estate even in a recovery. Housing inventories are not declining, and in many cities, inventories are growing.
Construction jobs lead to housing demand. Construction workers make $15 to $25 per hour. At that pace, their families can afford to own a home in most of the country. The earnings that people captured as roof layers and electricians are not matched by new work at a call center. Those jobs paid a lot of money. They paid a lot of money to men. This is not just a recession. It is a mancession. One problem, at least in terms of finding other jobs for construction workers, is that they face the same challenges that are bedeviling men throughout the workforce. Men are less likely to have a college degree to fall back on. Almost two in five construction jobs had evaporated in the last four years. Two percentage points of U-3 unemployment can be attributed to this one sector.
Consumers took out home equity loans. That debt fueled housing demand, but it also fueled employment in all kinds of other places. Home equity dollars accounted for nine percent of spending. Most of that spending didn’t produce housing construction. It produced demand for refrigerators, cars, and vacation cruises during the boom years. Now, banks are looking at the kind of lending with skepticism. The real estate boom made that possible, and indirectly, it helped to bid up the value of real estate. Banks gave consumers money because they saw housing prices going up. More money means more demand, which means higher prices. Less money – less demand – lower prices.
Real estate is the driver of municipal tax values. In turn, municipal spending augments the value of homes and neighborhoods. Builders generally don’t pay for new schools, sewers, and roads. Some communities have been able to pass impact fees, but that is the exception to the rule. If you don’t think that infrastructure helps real estate values, drive through a mobile home park sometime. Communities don’t pay for infrastructure there. They leave it up to the landowner. More often than not, the landowner does very little. Gravel roads without light don’t do much for enhancing yard appeal.
Stephen Auth, an analyst at Federated, has the opposite opinion. He says that new home starts are about to jump. Indeed, there are signs out there that signal the opposite. Teardowns are back in Fairfield County. Jumbo loans are cheaper. Land prices are showing signs of life. But there’s still the concern that new demand will be tempered by shadow inventory. There are scores of vacant homes across the country. Landlords have more than 1 million homes available for rent right now. If people can’t afford to rent, are they likely to buy?
