What’s the Housing Market Really Saying? “Show Me the Jobs.”

Posted by Dylan Taft on Monday, December 6th, 2010 at 1:00pm.

How can this be? Housing hasn’t been this affordable in many years, and interest rates are at record lows. Yet as everyone knows, the market remains stuck in the mud. Too many unsold homes, too few interested buyers. Experts have a lot of complex things to say about what’s going on, but the answer is really pretty simple.

An uncertain job future makes taking on a mortgage—even a historically low-rate mortgage that right now can be used to buy an exceptionally well-priced home—a very tough sell. So with unemployment still at record highs, it just makes sense that the housing market too continues to struggle.

It’s a predictably vicious cycle. Stubborn unemployment stalls the housing market, which then puts even more people out of work. That’s because, as even the stymied experts acknowledge, the economy relies heavily on new construction to stimulate job growth. According to the National Association of Home Builders, every new home that’s built creates three jobs for at least a year and generates around $90,000 in taxes. That’s in normal times. And that’s not now. As we all know just from driving down our roads, sellers are having a hard time finding buyers for their existing homes. This in turn shuts down demand for building new ones. So as fewer homes are built because jobs are scarce, jobs grow . . . even more scarce. And of course widespread unemployment can force homeowners to fall behind on their mortgages, and soon they too are selling into an already diluted and competitive housing market, thus feeding the cycle.

It’s true that lower interest rates can help a little. When rates finally fell to below 5% a few weeks ago, demand for home loans suddenly rose, according to Reuters.com. And lower rates help in another important way, when current homeowners who have no intention of selling are able to refinance mortgages that may be becoming a burden. The resulting savings enable them to stay in their homes and maybe even put something back in the bank.

So in time, it may be largely low interest rates that provide the boost the housing market needs to reverse course. And, if the tail can in fact wag the dog, if low rates help the housing market to turn around, perhaps the job market will too. Recent headlines claiming that the end of the recession has actually been sighted may have helped ease consumer fears, but they don’t seem to have put many people back to work yet.

With low interest rates enabling homeowners to save on their mortgages, and helping those who do want to sell to more easily find buyers, the current hope is that this alone will inevitably create more jobs. And if unemployment and the housing market are intertwined during times of economic hardship, then it must be so when things are improving too. It may take time—the backlog of foreclosed homes is still nearly endless—but as these distress sales are completed we’ll gradually see more and more need for new construction. New construction creates more jobs . . . . .and the cycle continues.

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