First, subprime mortgages exploded and home prices crashed. Then, the financial markets fell apart. Will unemployment be the proverbial next shoe to drop on the already weakened U.S. housing markets? If so, the implications for real estate will be profound indeed.
Historically, employment and home sales have been inextricably linked: People who had good jobs with steady paychecks bought homes while people whose income wasn’t reliable weren’t given home loans. Strong employment was a good indicator of future home sales while rising unemployment was an equally sure sign of fewer home sales on the horizon.
The housing boom seemingly changed that paradigm as so many fundamentals of real estate were temporarily thrown out or turned upside-down. Stated-income loans, originally intended for people who had substantial assets but irregular income, meant that a job was no longer a prerequisite to buying a home. As the rate of homeownership accelerated and lenders became more aggressive, these risky loans were handed out like Halloween candy to anyone who was willing to sign the (often fraudulent) paperwork.
But now that credit has melted like a chocolate bar left too long in the sun, stated-income loans are decidedly out of style. That’s good because it means more of the people who buy homes should be better able to make their mortgage payments; and while this observation may sound pat or old-fashioned, the ability to pay is the best way to prevent another wave of foreclosures.
Yet this renewed relationship between employment and housing could present some serious problems for realty brokers, salespeople and homeowners. Some forecasters have suggested that housing may pull through the current economic doldrums if employment holds up. But so far, that "if" looks pretty darn big.
Unemployment is already on the rise, and joblessness is likely to put additional downward pressure on home sales and prices. Home buyers may be tempted to rejoice at the prospect of cheaper houses, but that glee may turn sour indeed when they find themselves out of work.
The national unemployment rate has risen in fits and starts from below 4.5 percent in late 2006 to its current high-water mark of 6.1 percent in September, according to the federal Bureau of Labor Statistics. Those figures don’t include more than 1 million people who are "marginally attached" to the workforce or too discouraged by unsuccessful job-hunting to seek employment. (The 30-page BLS report contains a wealth of statistics and charts for anyone who wants more information.)
Employment has continued to decline in the construction, manufacturing and retail sectors, though jobs had been added in mining and health care. The construction industry, already struck by significant job losses, shed another 35,000 jobs in September, according to the BLS. The financial sector lost only 17,000 jobs in that month, but has lost 172,000 jobs since employment peaked in December 2006.
Five sparsely populated states had unemployment rates at least two percentage points lower than the national average in August. Those states were South Dakota (3.3 percent), Nebraska (3.5 percent), North Dakota (3.6 percent), Utah (3.7 percent) and Wyoming (3.9 percent). But eight states had unemployment rates at least 1 percent higher than the national average. Those states were: Nevada (7.1 percent), Illinois, (7.3 percent), Ohio (7.4 percent), South Carolina (7.6 percent), California (7.7 percent), Mississippi (7.7 percent), Rhode Island (8.5 percent) and Michigan (8.9 percent). It’s no coincidence that several of those states also have high rates of foreclosures.
Two real estate-related news items are relevant: Zillow earlier this month laid off 40 employees, or 25 percent, of its workforce while Redfin laid off 20 percent, or appropriately 20 people. And those two companies certainly aren’t the only ones that have downsized.
Higher unemployment obviously has a negative effect on housing. Job losses prevent twentysomethings from finding their first jobs just as surely as they throw their baby boomer parents out of work and into a job market that’s unreceptive to both younger unskilled people and older out-of-date workers alike. Unemployment prevents otherwise well-qualified people from buying homes, pushes more homeowners into foreclosure, especially if they’re already overburdened with debt, and keeps prospective home buyers who feel insecure about their paychecks on the fence. The real estate sector, which has lost plenty of jobs in construction, brokerage, lending and affiliated businesses, could shrink further.
The bottom line is that jobs are rightfully and once again an issue of grave importance to real estate. People whose businesses and livelihoods depend on housing would do well to pay attention to the trends and plan accordingly.
Marcie Geffner is a freelance real estate reporter and former managing editor of Inman News.
Copyright 2008 Marcie Geffner. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without written permission of the author.
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