As the National Association of Realtors opened this fall's gathering in New Orleans last weekend, the mood was decidedly different. The much-celebrated real estate boom has officially ended; nationally, economists now say, the housing market peaked in August 2005. For 2006, the industry expects existing-home sales to fall by 9 percent, and new-home sales to decline 17 percent. In some markets, prices have begun to fall, too.
So the mood is rather glum for the real estate brokers. The real estate boom has officially ended and we're currently in a real estate bust. Because of the double-digit price increases in home sales over the years, the demand for housing started drying up, causing an increasing supply of houses on the market, and thus forcing prices down on housing. And because of this housing market bust, we've got uncertainty in the market. Now here is what MSNBC had to say about the uncertainty:
That uncertainty stems from the fact that the current housing slowdown isn't like the more typical real estate busts of the early 1980s or early 1990s. Those downturns followed a traditional pattern: mortgage rates rose, job growth faded and the economy weakened, pinching people's ability to buy homes. Today, in contrast, mortgages are still near 45-year lows and unemployment is down, yet many buyers are reluctant to make offers. [Chief economist David] Lereah attributes this to high prices reducing the number of people who can afford homes, falling demand by investors and the public's psychological shift from celebrating the boom to worrying about a bubble. Those forces make this slowdown an anomaly, which makes it hard to predict where things will head next. Says Lereah: "You'd have to go back to the Great Depression to find a housing period that is this unique."
Now this is an interesting situation. Instead of the standard boom/bust of the housing markets, we have a situation where the public is worried about the housing bubble/bust even though both interest rates and unemployment are both low. Lereah calls this a psychological shift in the public's perception of the housing market, citing the Great Depression as an example.
And what caused this psychological shift? Here's what the real estate brokers say:
Few of the 30,000 agents and brokers in attendance—making this the biggest post-hurricane Katrina convention to visit New Orleans so far—were there for the economic forecasts....[Many] crowded into the convention center to attend seminars on how to adapt to the slowdown. In nearly every session, speakers spent a few minutes blaming the media for hurting the market. All those headlines about a bursting real estate bubble have a lot of potential buyers really freaked out, industry officials say, which is one reason they've begun running full-page newspaper ads reminding would-be sellers that despite slowing sales, conditions aren't really so bad.
YES! It's the media's fault! If the media had not reported all those statistics pointing to the slowdown in the housing market, then Americans would not have been psychologically spooked into this housing bust, and thus causing this entire housing bust for which the brokers are complaining about.
What these real estate brokers should be looking at are a combination of the nation's job statistics, the income inequality gap, and the disappearance of the U.S. middle class. While the brokers, economists, and politicians love to tout the low 4.4 percent U.S. unemployment rate, the real estate brokers should be asking why employers added only 92,000 new jobs, instead of the economist's expectations of 125,000 jobs. The brokers should also be asking where those jobs are increasing, and where the jobs are disappearing from in the U.S. labor market. Because if the American jobs are increasing in the low-wage retail sector (i.e. Wal-Mart), then you can bet that those Americans employed in the retail industry will not be able to purchase the $217,000 median price of a U.S. home--let alone for the $733,500 median price for a home in Santa Clara County, California.
The real estate brokers should also be taking a hard look at income inequality. According to this January 2006 Boston.com news report:
PORTLAND, Maine --The disparity between rich and poor is growing in America and in Maine as the federal minimum wage has remained flat for years, union membership has declined and industries have faced global competition, according to a new study.
The report, released Thursday by the Center on Budget and Policy Priorities and the Economic Policy Institute, both liberal-leaning think tanks, found the incomes of the poorest 20 percent of families nationally grew by an average of $2,660, or 19 percent, over the past 20 years.
Meanwhile, the incomes of the richest fifth of families grew by $45,100, or nearly 59 percent, the study by the Washington-based groups said. Families in the middle fifth saw their incomes rise 28 percent, or $10,218.
[....]
The poorest one-fifth of families nationwide had an average income of $16,780 in 2000-03, while the top fifth of families had an average income of $122,150 -- more than seven times as much, the report said. Middle-income families' average income was $46,875.
Here again, when you have some of the poorest families earning $16,780 in 200-03, then those families are never going to be able to become homeowners, no matter how low the mortgage rates will go. But the real scary number here is the gap between the rich and the poor, where the lowest one-fifth of American families found their incomes increase by $2,660 over the past twenty years, verses the top one-fifth of American families seeing increases of $45,100 in the past twenty years. When you have such an income inequality gap growing, you're going to see a number of potential homeowners getting priced out of the market--in other words, you have customers who will never be able to purchase homes because of the stagnating income. And there are only so many homes that the upper rich Americans are willing to purchase as second, third, or vacation homes. This is a problem, since the bread-and-butter home ownership is the middle class. And the middle class is getting squeezed here. According to this June 22, 2006 Washington Post article:
INDIANAPOLIS -- Middle-class neighborhoods, long regarded as incubators for the American dream, are losing ground in cities across the country, shrinking at more than twice the rate of the middle class itself.
In their place, poor and rich neighborhoods are both on the rise, as cities and suburbs have become increasingly segregated by income, according to a Brookings Institution study released Thursday. It found that as a share of all urban and suburban neighborhoods, middle-income neighborhoods in the nation's 100 largest metro areas have declined from 58 percent in 1970 to 41 percent in 2000.
Widening income inequality in the United States has been well documented in recent years, but the Brookings analysis of census data uncovered a much more accelerated decline in communities that house the middle class. It far outpaced the decline of seven percentage points between 1970 and 2000 in the proportion of middle-income families living in and around cities.
Middle-income neighborhoods -- where families earn 80 to 120 percent of the local median income -- have plunged by more than 20 percent as a share of all neighborhoods in Baltimore, Chicago, Los Angeles and Philadelphia. They are down 10 percent in the Washington area.
It's happening, too, in this prosperous, mostly white middle-income Midwestern city where unemployment is low and a vibrant downtown has been preserved. As poor and rich neighborhoods proliferate, the share of middle-income neighborhoods in greater Indianapolis has dropped by 21 percent since 1970.
"No city in America has gotten more integrated by income in the last 30 years," said Alan Berube, an urban demographer at Brookings who worked on the report.
"It means that if you are not living in one of the well-off areas, you are not going to have access to the same amenities -- good schools and safe environment -- that you could find 30 years ago," he said.
This is a serious problem for middle-class neighborhoods. As middle-class neighborhoods decline into lower, poorer-class neighborhoods, you're certainly going to see both a decline in the quality of schools and education within those neighborhoods, as well as an increase in crime and drug abuse there. With the increase in both rich and poor neighborhoods, a new problem enters into this declining middle-class--segregation:
The decline of middle-income neighborhoods may also be a consequence of increased economic opportunity and residential mobility, especially for upper-income minorities, said Joel Kotkin, an urban historian and senior fellow at the New America Foundation.
"This is about upward mobility and class. Until the 1970s, middle-class blacks and other minorities often had little choice about where they could live," said Kotkin, the author of "The City: A Global History." He added: "They usually had to live close to lower-income people of their own race. Now, if they can afford it, they can move to higher-income neighborhoods. Dollars trump race. Many choose not to live around poor people."
The Brookings study says that much more research is needed to better understand why middle-income neighborhoods are vanishing faster than middle-income families. But it speculates that a sorting-out process is underway in the nation's suburbs and inner cities, with many previously middle-income neighborhoods now tipping rich or poor.
[....]
The Brookings study says that increased residential segregation by income can remove a fundamental rung from the nation's ladder for social mobility: moderate-income neighborhoods with decent schools, nearby jobs, low crime and reliable services.
The increase in residential segregation by the two extremes results in the loss of social mobility for those in the lower rungs of America's economic classes. Middle-class neighborhoods contain decent schools, low crime and reliable social services to allow poor people to move up the economic ladder. With this declining middle-class neighborhood, poor neighborhoods end up with high crime and lower-performing schools. Poor neighborhoods are caught in a downward spiraling cycle. Over time, the combination of the increasing income inequality gap, the decline of the middle-class neighborhoods and the increased segregation between rich and poor neighborhoods can cause havoc in the housing market as Americans face the problems of both class warfare, and watching the American dream of owning a home fade away. It is these Americans who are the potential customers for the real estate brokers.
There is so much more here I could say about stagnating wages, globalization and the outsourcing of both manufacturing and professional jobs, the decline of unions, the gap between wages and productivity, or even the gap between the American company CEOs and the average American worker. All of these problems can tie into American’s inability to purchase affordable housing. In addition, there is the issue of sub-prime mortgages and adjustable rate mortgages being sold to lower-income Americans who could easily lose their homes if they lose their jobs to outsourcing and globalization. This is also a problem that the real estate brokers seem to ignore. There are long-term structural trends in the U.S. economy, the labor market, and even the housing market that these brokers do not have a clue as to an understanding. I’m not sure I understand them completely myself.
But I fear that they will become a problem over time.
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