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September 6, 2011

Economic Recovery without Housing?

Earl 'Rocky' Mackintosh

It has never been accomplished before in modern times, but could the economy come back to nearly full strength without a real estate comeback in housing?


Consider the following: Within the total of all housing units on the market for sale, over 2.2 million are vacant, plus another 7.5 million liquidations from mortgage delinquencies, according to an August 8, 2011 newsletter entitled "REBUILD – What to Do About US Housing" made available through Kate Costlow, with the Frederick, Maryland Office of Morgan Stanley.


There is a growing decline in the homeownership rate which has caused rental vacancies to drop significantly and rents to jump. "This trend can only continue for a limited time before rents become unaffordable and larger problems arise," according to the newsletter's authors.


Nationally 31% of actual closed housing sales in the U.S. are from foreclosures and short sales. In Frederick County the figure is closer to 35%, according to A. Wayne Six, a local real estate appraiser.


About 27% of all homes in America have negative equity … the debt is greater than the value of the home, this according to a February 9, 2011 article in Bloomberg News by John Gittelsohn. While nearly nine months have passed since the article was written, it is likely that the figures have not changed substantially.


Home values across the country have continued to fall year after year since October 1, 2006, by a net annual average of 6.8%. The Las Vegas, NV, market is close to leading the country with a steep annual decline of 26.2% in home values with a June 2011 median price of $118,600 … that's a 250% drop in nearly 6 years! On the other hand the Pittsburg, PA, metro area has actually experienced a 1.2% increase in values to $110,000 since 2006! This information was gathered from


The website also reports that the Washington, D.C., metro area has experienced an overall decrease in values since 2006 of 35%, while one of its submarkets, Frederick County, has seen values fall by 56% in the 69 months up to June 2011.


There was an average of 1.56 million annual housing starts in the U.S. between 1996 and 2006. As of July 2011, the seasonally adjusted annual rate was 604,000, displaying fall of 61% in activity gathered from data compiled from the U.S. Department of Housing and Urban Development.


Historically the premium of new home price above existing home price has been about 15%, but data shows a rise in that gap to an average of 45% among median home prices, according to a March 21, 2011, article written by Lawrence Yun, chief economist and senior vice president of research with the National Association of Realtors.


Mr. Yun states that this "exceptionally large price differential between new and existing homes may imply that either new home prices have to fall or that there is good growth potential for existing home prices."

"The price of newly constructed homes refuses to budge downwards … Though construction workers’ wages have not changed in the past four years (stuck at $38 per hour on average), the costs of construction materials have been rising." Yu said in a subsequent post dated article on September 1, 2011. "As a result, homebuilders simply cannot lower the price without suffering a financial loss. That is, it is better not to build than to build and then have to slash the price."

The price gap between existing and new homes can't get much wider before more consumers gravitate more toward the better deals in the existing home market, putting even greater pressure on the struggling new home sector.

Clearly the elephant in the room is the sector of the housing market that represents negative equity-generated sales. With figures ranges higher that 50% in some markets, until this is burned off the home building industry will continue to struggle.


It is estimated that between 15 to 20% of the all jobs in the U.S. economy are related to the construction industry, according to Dr. Edmond Seifried, co-chairman of Seifried & Brew, a community banking consulting firm based in Allentown, PA.


The New York Times recently published a graph showing the length and depth of all U.S. recessions and jobless rates since 1974. The stirring chart graphically displays how far the economy has to go in order to reach something close to what we have considered normal.


In a white paper entitled "Can the US Economy Sustain the Current Recover Without a Healthy Housing Sector?" Mr. Seifried shows that the percentage of the U.S. Gross Domestic Product (GDP) of major product expenditures has changed since 1960. At that time goods represented 33.6% and services were 29.4% of GDP. Today a major reversal is seen with goods at 24.2% and services at 47%. Housing has experienced one of the most significant drops from an average of 4% to 5% of GDP in the last 50 years to today's figure of just over 2%.


"It is difficult to imagine an overall economic recovery that will generate sufficient jobs to return the U.S. economy to full employment without a return of housing to its historical share of GDP," Mr. Seifried states.


Many solutions have been discussed by economists and politicians, among others, on what the government and the private sector can do to stimulate the housing sector.


Meanwhile, as long as 27% of American homeowners live in homes that are valued less than what is owed the lender, it is unlikely that consumer confidence will gain enough steam to bring about anything other than very modest gains over the next few years.


Such gains are not likely to improve the employment picture, which in turn holds back a rebound in the office, commercial and industrial real estate sectors of the economy.


Rocky Mackintosh is the owner of a land and commercial real estate firm based in Frederick. He is also the editor of the MacRo Report Blog.


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