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Real Estate Market Commentary - September 2011
by Peter L. Zachary, MAI, MRICS

Commentary on the Real Estate Market as of September 2011 By Peter L. Zachary, MAI, MRICS

The month of September started out with some bleary news about job growth. The New York Times had a front page article on September 3, 2011 entitled "Zero Job Growth Latest Bleak Sign for U.S. Economy Jobless Rate Still 9.1% and White House says it May Stay High for Months" and the New York Post had on its front page "None, Zero, Zilch - That's How Many Job Were Created in the U.S. Last Month". President Obama's picture was below the word "Zilch".

In my opinion job growth and housing prices are intertwined. Without job growth there will be no increases in housing prices. The New York Times article stated the following. "August brought no increase in the number of jobs in the United States, a signal that the economy has stalled and that inaction by policy makers carries substantial risk."

The government report on hiring, released on Friday, prompted another round in a relentless diminution of economic expectations. The unemployment rate, at 9.1 percent, did not change last month, and the White House said it was expected to stay that high through at least 2012.

Some economists said the possibility of a double-dip recession was increasing.

"As long as payrolls are weak, you will continue to hear cries of not just recession risk but cries that the United States is in a recession and we just don't know it," said Ellen Zentner, the senior United States economist for Nomura Securities.

Even if the economy does not contract, the projected growth rate is so slow it will not be enough to absorb new people entering the labor market, much less the unemployed.

"We have virtually the same number of jobs as we did in January 2000," said Patrick J. O'Keefe, the director of economic research at J. H. Cohn, an accounting firm. "Were jobs to continue to grow at the 2011 monthly average, it would take more than four years to return to the prerecession employment level."

The problem is less that companies are laying people off than that they are not hiring. Consumers and employers alike seem almost frozen in place, with many economists saying that they seemed paralyzed by uncertainty about the future after the brinksmanship of the debt ceiling debate, the ensuing cut in the United States credit rating by Standard & Poor's, stock market whiplash and more bad news from Europe."

On September 21, 2011, The Wall Street Journal had a front page article entitled "Home Forecast Calls for Pain - Prices to Stumble Through 2015, Economists Say, Weighing Down Recovery". This is an important article for the real estate market, because it will summarize what has happened and makes a projection for the future.

It stated: "Economists, builders and mortgage analysts are predicting the weakened U.S. economy will depress housing prices for years, restraining consumer spending, pushing more homeowners into foreclosure and clouding prospects for a sustained recovery.

Home prices are expected to drop 2.5% this year and rise just 1.1% annually through 2015, according to a recent survey of more than 100 economists to be released Wednesday. Prices have already fallen 31.6% from their 2005 peak, as measured by the Standard & Poor's Case-Shiller 20-city index.

If the economists' forecast is accurate, it means housing faces a lost decade in which home prices recover just a fraction of what was lost between 2005 and 2015, leaving millions of homeowners with little, if any, equity in their homes. The survey was conducted for MacroMarkets LLC, a financial technology company co-founded by Yale University economist Robert Shiller.

The housing bust has chilled consumer spending-the largest single driver of the U.S. economy-with eroding home equity contributing to the so-called reverse wealth effect that prompts people to spend cautiously because they feel poorer.

One in five Americans with a mortgage owes more than their home is worth, and $7 trillion of homeowners' equity has been lost in the bust. Homeowners' equity as a share of home values has fallen to 38.6% from 59.7% in 2005.

"With all of the economic turmoil, both domestic and international, there's not much that points to an improving housing market at any point in the near future," said Ara Hovnanian, chief executive of Hovnanian Enterprises Inc., the U.S.'s seventh-largest builder by deliveries.

While home prices aren't falling at anywhere near the pace of 2008, one worry is that even modest declines become self-reinforcing, pushing more homeowners underwater and exacerbating the downdraft caused by more foreclosures.

That, in turn, could prompt more credit tightening by lenders, further shrinking the pool of home buyers when more are needed to purchase bank-owned foreclosures.

The housing bust is weighing on the economy in part because bank-owned foreclosures have sidelined new construction, a traditional employment engine following a downturn.

The fallout from the housing bust hasn't been easy on Greg Rubin, owner of California's Own Native Landscape Design, a landscape contractor in Escondido, Calif.

With sales down by half from 2007, Mr. Rubin has reduced his work force to nine people from 21. He now does jobs for as little as $4,000 versus no less than $10,000 in the past.

With home values no longer increasing, the few people who are hiring Mr. Rubin are paying with cash savings instead of home-equity loans, substantially decreasing their purchasing power.

Also, Mr. Rubin said, home prices have been battered for so long that many people have stopped believing home improvements will increase the value of their property.

"There's this psychology that home prices are dropping independent of whatever improvements they make, so it's a lost cause to do them now," he said."

The above comments of Mr. Rubin are very telling. People don't think that home improvements will increase the value of their property, therefore they are not making home improvements. No home improvements, means fewer jobs.

This article also talks about how home prices are to drop 2.5% this year and rise 1.1% annually through 2015, according to a survey of economists with housing prices falling 31.6% from the 2005 peak. I don't know how these economists projected a 1.1% increase through 2015 with the economy being totally flat. Although in my opinion a 1.1% increase and a 1.1% decrease are virtually the same. It is not a significant percentage change.

Unfortunately, there is little good news on the horizon. Unless the United States can invent a way to turn water into gasoline, things will be difficult for everyone for some time.

Read previous Real Estate & Housing Market News.


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