Why household debt reduction could jumpstart economy

September 19, 2011

If we could move beyond the housing crisis, where would we find the seeds of a broad-based turnaround?

Right now most of the country is anguished over the slack job market and global economic uncertainty. Almost half of U.S. homeowners are feeling house poor. That is, most folks can’t get their wealth out of their homes or even put a realistic price tag on it. They may even be stuck in a house that’s worth less than its mortgaged value.

This morass has led to a massive liquidity and consumer psychology malaise. Is there a way out? Yet there are signs that the clouds are parting.

Ingo Winzer, president of Local Market Monitor, a real estate information service, says he is seeing indications that lower consumer debt and increased spending may lead to an uptick.

“After 28 straight months of pulling back on the reins, consumers have finally found a level of debt that feels good enough to allow more spending to flow,” Winzer surmises.

“During those 28 months, the level of consumer debt per person — let’s leave mortgages out of this — fell 13 percent, from $8,600 to $7,500. During the last recession with a real estate crash, 20 years ago, consumer debt dropped 14 percent.”

Yet what about all of those millions of homes on the market, the unresolved foreclosure mess and an economy that isn’t really creating any new jobs?

Winzer admits that any rebound will take time, estimating that the U.S. over built some five million homes in a country that supports about one million new home sales annually.

“It can take up to 10 years for prices to recover,” he adds, “and then you won’t see prices go up 10 percent a year again. It’s a messy, sticky, drawn-out process.”

Part of Winzer’s theory is that because many Americans have paid down their debts — and increased their savings rates — they may be ready to spend again. After all, when the banks imploded and a recession was triggered, everyone on Main Street retrenched as Wall Street got bailed out.

Add to that the ongoing need to replace and repair everything from dishwashers to vehicles. If there’s money coming in, you can fix the roof, the garage-door opener and washer, as we did in our household this summer.

Still, there’s the vexing matter of producing and preserving jobs. I doubt whether anything the White House or Congress will have much impact on this dismal situation until consumers start spending again to create demand for goods and services.

In the interim, you can either be patient and hope that your real estate investments rebound over time or follow the growth, which is only in a handful of markets. Generally the biggest success stories were in most of the cities in Texas, largely due to energy-industry robustness and the fact that Texas largely avoided the 2008 debacle. It was no miracle; the Lone Star state took its lumps a decade earlier.

Bright spots include the New Orleans area, which is still rebuilding after Hurricane Katrina and old Midwestern manufacturing hubs like Grand Rapids and Benton Harbor, Michigan, and Kokomo, Indiana.

There are some other surprises, but the general theme is cities that are doing the best mostly avoided the bubble or are showing some job growth. Here are some fresh numbers prepared for Reuters from Local Market Monitor:

  • Best Cities for Actual Home-Price Appreciation: (last year through Sept. 6): Honolulu (+ 2 percent); Buffalo-Niagara (+ 1 percent); Pittsburgh, San Antonio and Albany, New York (all flat).
  • Best Cities for Forecast Appreciation: Milwaukee (5 percent); Dallas, San Jose, San Antonio and Honolulu (all 4 percent).
  • Biggest Turnarounds in Three Years: Bakersfield (4 percent); Boise (3 percent); Las Vegas (2 percent); Phoenix and Tucson (1 percent). Note: These markets are currently down from 11 percent to 16 percent year to date and down at least 30 percent from the bursting of the bubble in 2007.

If Congress wanted to accelerate spending and boost the housing market, a reasonably quick fix would be to start selling or offering rent-to-own homes from the vast inventory of the mortgage giants Fannie Mae and Freddie Mac. The two mortgage insurers are now wards of the state after the federal government seized them in late 2008 — yet another thorn in the side of the U.S. home market.

In the short term, this massive liquidation of housing stock could depress home prices in certain areas. Then again it could also spur buying at bargain prices if new homes on the market truly reflect depressed market local conditions. The situation facing Congress and the banks will result in a Pyrrhic victory in any scenario. The pain will be short-lived and acute in many areas.

Prices will have to adjust to what the market will bear — perhaps a haircut of 40 percent or more than what they were in 2006. Only then we can proceed with our lives and get an accurate fix on what our housing wealth really is and act accordingly.

August 2010 Median List Price August 2011 -Median List Price
Fort Wayne, IN $100,000 $112,700
Punta Gorda, FL $149,900 $169,900
Naples, FL $299,900 $359,900
Miami, FL $199,900 $249,000
Fort Myers-Cape Coral, FL $159,900 $213,000
August 2010 Median List Price August 2011 Median List Price
Chicago, IL $229,900 $199,900
Las Vegas, NV-AZ(NV) $135,000 $119,900
Atlanta, GA $179,000 $159,900
San Francisco, CA $689,000 $619,800
Santa Barbara-Santa Maria-Lompoc, CA $599,000 $539,000
*Data courtesy of the National Association of Realotrs
One comment

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Only a fool would catch this falling double edged knife (buy a house now) and get sliced thin like a turkey.

Housing price is and will continue to slide much lower for a long time because of the Alan Greenspan/Wall street/SEC housing scam for the past two decades which has super inflated housing (glorified cardboard boxes) prices sky high.

If you are underwater(your mortgage amount is more than recent appraisal value, minus 10%) you ought to find a rental (which are so much cheaper than your ridiculous mortgage + ever increasing taxes, since Wall St looted your already broke township with derivitive bond scams, and illegal immigration + teachers unions are giant unfillable holes in your school budget) and send the keys to your mortgage company.

Dear leader, chairman ObaMao is subsidizing all losses via Freddie/Fannie Mae/taxpayers bailout anyway. Why not take advantage of this generous government benefit?

Remember the SEC and the FED have allowed Wall st and banks to loot the American Taxpayer. No need to pay twice.

America, Its time to “put a boot in their a*s”.

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