If the extraordinary and unpredictable haven’t completely crushed the housing market, the conventional and cyclical may yet finish the job.
Much has been made of the popping of the real estate asset bubble and the entrenchment of the credit crunch.
But little attention has been paid to what a recession and accompanying spike in unemployment could do to a housing market already stricken by faltering sales, sinking prices, high interest rates and soaring foreclosures.
And the timing couldn’t be worse.
“We're now looking at a housing market that's made a lot of adjustment and people are wondering where is the turning point,” says Nigel Gault, chief US economist at Global Insight. “But we're also now at a point now where the broader economy is slowing down and unemployment is rising. The broader economy couldn’t hold up indefinitely as housing was plunging.”
“Absolutely,” echoes Dean Baker of the Center for Economic Policy research. “We're now going to see an add on effect from job losses.”
Current trends and data portray an economy on the road to recession
The unemployment rate spiked to 5.5 in May and moved to 5,7 percent in July—a 3 ½-half year high and well above its expansionary low of 4.4 percent in March 2007—and is expected stay there in August. Non-farm payrolls have declined every month this year and are expected to do so again in August.
Unemployment is up significantly.
The number of unemployed was 8.874,000 in July, a four-year high and almost 2 million more than 16 months ago. Weekly initial jobless claims averaged 400, 250 in the past four weeks.
“That’s recession levels, “ says Dean Baker, who expects the jobless rate to peak somewhere between 6.7 percent and 7.2 percent. “We're really just at the beginning of things.”
Others are predicting things will get worse before they get better.
Outplacement consultancy Challenger, Gray & Christmas recently forecast that “uncharacteristically heavy job cutting over the summer months could lead to the largest post-Labor Day downsizing since 2002. The firm adds that if the pace of the last three months continues through December, annual layoffs will exceed one million for the first time since 2005.
It’s already the case that some of the worst "bubble boom" housing markets and the economy’s geographical weak spots have unemployment rates well above the national average.
Home Price-Jobless Correlation
In the Riverside-San Bernadino-Ontario metro area in southern California, the median price of an existing home was down 32,.7 percent from a year ago, as of the second quarter, based on data from the national Association of Realtors. The jobless rate there was 8.9 percent in July vs. 4.5 percent in April 2006, around the general peak of the housing boom.
A slowdown in the massive trade sector of Southern California, for instance, is having a negative trickle down effect on that metro area and others.
In Florida, the Cape Coral-Fort Myers metro area has seen prices fall 33.1 percent during the same period, while the unemployment rate has jumped from an average of 4.7 percent in 2007 to 7.5% in July.
In economically depressed Michigan, the jobless rate was 8.5 percent in July vs. 6.8 percent in April 2006, when the national economy and housing market were both healthy. In Ohio, the rate was 7.2 vs. 5.4 two-plus years ago. Prices in the Lansing and Cleveland metro areas are down 19.0 percent and 17.0 percent, respectively.
“There's definitely a relationship,” says Baker. “Where there's unemployment, there's downward pressure on prices.”
The converse is also true. In Honolulu, where prices fell just 4.4 percent, the jobless rate was 3.9 percent in July. In Seattle, prices are down 3.7 percent and the jobless rate is 4.7 percent.
Foreclosure rates show a similar pattern. California and Florida have foreclosure rates of one in every 180 or so households, according to RealtyTrak. Ohio and Michigan are both near 400. Meanwhile, Washington’s rate is about one per 1000 and Hawaii’s one in some 2200.
Rick Sharga, SVP at RealtyTrac, sees unemployment adding ”another leg” to the foreclosure problem, adding that before the arrival of sub prime, credit crunch factor, “the single best predictor of foreclosure rates was the unemployment rate.”
Sharga says it’s already a force in the Midwest. “Clearly what is driving activity in those states is unemployment,” he says. “Take Michigan. The economy got worse a lot faster there than the national economy and still is worse. Ohio, too.”
“If we do see an economic downturn then all bets on this foreclosure cycle being over are off,” he says. “Prices will become vulnerable again. You're going to see more price depreciation.”
In some areas, where housing boomed the most – southern Florida and California, the spike in unemployment reflects the loss of jobs in the construction industry and those that feed off it.
As of July, the economy had 516,000 less construction jobs than at the end of 2006, which outpaced losses in the manufacturing sector.
Though the worst may be over in that job market, the worse may be yet to come in others. The weakening labor market was one reason the National Association of Home Builders’ August forecast called for a mild recession in the fourth quarter of this year and the first of 2009.
Gault of Global Insights expects payroll declines to hit triple digits, surpassing the previous single worst monthly decline of 88,000. Baker says the monthly decline “might hit 200,000, but otherwise expects losses well above the 100,000 level.
“If the economy slips into recession, the stabilization becomes a thing of the past,” echoes Robert Brusca, chief economist at Fact & Opinion Economics
There are other worrisome signs about the economy as well as other forces could compound the threat to housing.
Consumer Spending Sputtering
Consumer spending continues to slow. Growth in that key economic area fell short of 2 percent in the second quarter for the third straight quarter. According to David Resler, chief economist at Nomura International, the four-quarter growth is down to 1.4 percent, the slowest pace since the fourth quarter of 1991.
“Growth has been slower only during full-fledged recessions,” Resler noted in a recent analysis.
That weak showing came despite a government stimulus package that included tax rebate checks, the last of which arrived in July.
That massive $168 billion plan signed into law in February, however, did not include conventional measures such as an extension of jobless benefits and highway construction funds, which generate jobs and income.
When Washington finally enacted legislation in late July, it extended jobless benefits 13 weeks for those who had exhausted the standard 26 weeks of benefits. The extension, which runs through March, is less than the last time, such benefits were extended when it spanned March 2002-December 2003.
The mechanics of the recent housing rescue package has also drawn mixed reviews, especially about its potential to spark sales, which would support prices. Measures for homebuyers include a small tax deduction and a tax credit of up $7500.
“I think that plan is likely to have very limited effect,” says housing specialist and professor Christopher J. Mayer, who is also Vice-Dean of the Columbia Business School “People need the cash at closing, not when they file tax returns.
Interest Rate Drag
In a recent study, Mayer is also argues that unusually high interest rates have been hurting prices, as well as sales
That’s another key to the labor-real estate market dynamic and a potential break with the past.
Lawrence Wun, chief economist at the National Association of Realtors, says as jobs disappeared during the 2001 recession, home sales rose just the same because mortgage rates were falling.
“Rates have a bigger impact,” says Wun. “In this case, we already have low rates,” says Wun. ”It is likely rates won't fall as we are losing jobs. It will probably have a negative impact.”
Rates may be historically low – averaging about 6 1/2 percent for a 30-year fixed loan – but the spread is unusually high.
The spread – or difference between the rate on a 30-year mortgage and the yield (or interest rate) on the ten-year Treasury note -- was about one and a half percent, or 150 basis points for most of the decade-long housing boom. In recent months – despite the Federal Reserve’s aggressive cutting ---it’s been two and a half percentage points or more.
It’s one of the reasons why the NAR’s affordability index isn’t higher and recently fell below its level of November 2007, before the Fed slashed rates and the credit crunch spiraled out of control.
The interest rate environment is even worse for jumbo mortgages, the premium for which is running one percentage point higher than the usual 20-30 basis-point markup.
“I think it’s going to be a while before we see mortgage rates spreads back to where they were.”
If so, that will depress sales and prices, as it discourages money-conscious, layoff weary consumers, who are also facing tougher borrowing standards. Meanwhile, homeowners who want to sell – or worse, need to sell (perhaps because of looming foreclosure) – are more likely to be stuck with their properties.
“If people are worried about losing their jobs or are losing their jobs, housing is the kind of purchase you can easily postpone,” says Gault