The current economic recovery is staggering along.
The long “tail” is due to the substantial structural imbalances in the economy. From high consumer debt to state and local governmental financial problems, the recovery has been inhibited by structural factors that will take time and behavioral changes to correct.
The housing bubble and its subsequent ripple effects on consumers and financial institutions are at the top of the list. The direct economic impact from 12.5 million foreclosures is something the US has not experienced.
However, the impact from the housing bubble is much broader than just foreclosures. Write-downs will also continue to shape the recovery for years to come. For example, the loss of 2 million construction jobs is a key contributor to the hesitant bounce back in job creation. And all these job losses have an impact on local communities as well as overall economic vitality.
Experience tells us that in most economic recoveries housing is a positive stimulus to growth and job creation.
At times, this has accounted for one-fifth of early cycle growth.
In this current cycle, there has been no positive contribution to growth or to employment. And Housing has been detracting from growth. And with 23 percent of all mortgages being upside-down, there is an impact on labor market mobility as well as the speed at which the economy can adjust to changes in local market economic conditions.
Another consequence of the bursting housing bubble involves the impact on the health of household balance sheets and consumer confidence.
Since 2007, there has been a decline in home values of almost $6 trillion. That’s presents a staggering impact on balance sheets and weighs heavily on consumers who are weighing all these factors with fear and trepidation. For many individuals, homeownership has been a core asset for retirement savings. Knocking the underpinnings out of this core savings component has a broad impact on household attitudes toward their preparedness to meet future retirement needs.
So as observers wonder about the lackluster recovery, it is very helpful to spend some time on the underlying structural imbalances which need to be corrected prior to the economy fully regaining its footing. The housing crisis the United States is experiencing is one of the most severe imbalances in our history and it will take many years to readjust.
In the interim a bit of caution is recommended regarding the pace of the recovery. We are in for a long journey and investors need to be prepared.
Paul Ballew is the Chief Economist for Nationwide Mutual Insurance Company . He joined Nationwide in November 2007 and is responsible for providing macro-economic analysis and commentary for Nationwide's broad portfolio of protection and retirement business lines. Ballew also maintains his advisory role with the Fed as well as serving a number of Boards of non-profit organizations.