Let us be blunt, the economic news in the United States is still pretty bad. A new survey of college graduating college seniors indicated that 85 percent said they planned on moving back with their parents after graduating. They simply cannot find jobs.
As for senior citizens, those over the age of 55, the unemployment rate, in the US is 7.2% in September a shocking increase from 2.9% in September 2006.
In Europe, the news is not much better. The British Government announced a plan that will cut 500,000 government jobs and steeply cut welfare payments. In France, people have rioted in the streets, protesting the retirement age being raised two years from 60 to 62. The changes were passed anyway.
In Asia, Japan is sending even more jobs overseas, which means an even higher unemployment rate. Further the strength of the Yen makes Japanese products more expensive. To correct a high Yen, the Japanese are looking for lower wage countries to manufacture their products. This move is ever prevalent within Japan’s automotive industry. Toyota is set to produce 57 percent of its cars overseas, up, sharply from 48 percent in 2005. Even more shocking, Nissan will produce 71 percent overseas, up a frightening 66 percent just last year. Can we say sianora to jobs in Japan?
What does this mean?
Let’s look at the real estate mess for a second. After sub-prime loans metastasized through the financial markets and the housing price bubble burst, over a quarter of US homeowners have negative net equity in their homes. Several million residential mortgage loans are in the process of foreclosure. Many homeowners are underemployed and cannot pay their existing mortgages. Many others are finally saving some money. They no longer care and are waiting for the banks to take their homes. Why? Their mortgages far out-value their homes. The mortgage mess in the US is simply getting worse. There are a growing number of people who have jobs but who are also choosing not to pay their mortgage because they see no point.
If this trend turns into an avalanche, the real estate market will crash again.
The leading edge of the storm was the subprime mortgage defaults in 2007. The trailing edge of the storm will be the defaults of consumers who are solid citizens, people who have good jobs and good credit. Loan workout strategies so far favor banks, and most do not correct for the negative net equity problem. Until this happens, we are just delaying the inevitable.
How severe the second front of the storm will be remains to be seen unless federal programs helping homeowners avoid default are successful, many more banks could become insolvent, making the second half of the storm very severe.
Loss of house value also affects ability for homeowners to access equity in their homes for vacations, discretionary purchases and big ticket items, including college education for their kids. The days of easy second mortgages are over.
Also, housing starts typically lead the nation out of a recession. Not this time. Oversupply of product, coupled with the fact that housing prices are still well above the long term growth rate of 4% means this sector will be very quiet for a few years still to come. The economy needs another horse to pull the wagon.
Now for small economic lession: Every time the FED implements quantitative easing, or printing more money, two things invariably increase: taxes and inflation. When taxes and inflation go up, more jobs are lost. Less people pay their mortgages or purchase big ticket items. The economy stagnates further.
Then there is the Medicare problem in the United States. In 2019, Medicare goes broke. This will be another program the American public needs to fix. Affordable? No.
For some, the recession has been like a major storm passing through. Some people have lost everything in the current storm; but now the existing levies are about to break and the flooding will begin. For others, the recession never started. The reality is, sadly, that it’s far from over. We must all be careful how we invest next year.
*Robert Simons is a visiting lecturer at the Technion in Haifa, on sabbatical. He is a professor of Real Estate Economics from Cleveland State University. Prof. has published over 45 articles and book chapters on real estate, urban redevelopment, environmental damages, housing policy and Brownfield’s redevelopment. He authored a book entitled Turning Brownfields into Greenbacks, (published by Urban Land Institute), and When Bad Things Happen to Good Property, (published by Environmental Law Institute in 2006)
