Real Estate Recession Looming?
A recent chart from InvesTech Research—correlates changes in private residential construction with recessions. Going back to 1968, it shows that with just one exception, every time there has been a downturn in residential construction, a recession has occurred at the same time or shortly after. (The exception: 1995.) That indicator, too, is flashing red, because residential construction has shrunk over the past year. “Being a student of history, I would think I would want to play it very cautiously from a stock standpoint,” says Standard & Poor’s Chief Investment Strategist Sam Stovall. San Diego downtown condos
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Linking the current market correction to a recession is an approach that I have not seen before. I would however counter that in previous decades the real estate turned as a result of significant economic decline. I use for example the last crash in California in 1989 when the defense contractors pulled out of California and much of the employment base left the state.
In today’s market, I believe that a significant economic slowdown is highly unlikely. As the real estate market has shifted, many investors have simply moved their money back into the stock market; with only a small impact to employment and the national economy.
RW
4MySales.com
As home prices have risen, an increasing number of homeowners have tapped the equity in their properties one of three ways: via cash-out mortgage refinancing, home-equity loans, or outright sales of their homes. A significant amount of this liquidity has gone to power consumer spending.In a paper published in September 2005, Federal Reserve Board Chairman Alan Greenspan found that borrowing against home equity accounted for 6.9 percent of all personal disposable income in 2004, or roughly $600 billion. That is unprecedented and astounding. Basically, Mama and Dad have used their home like an ATM and the balance in that account is starting to go down!
The volume of home sales has spurred the economy in other ways as well. For example, home sales contribute to overall consumption. When people buy a new home, they tend to make improvements, buy new furnishings and a variety of other home-related purchases. Home sales have also contributed to employment. Over the course of 2004 and 2005, more than a half-million jobs were added in the construction sector, with many of those coming in residential construction and contracting, while nearly 100,000 jobs were created in the real estate sector, according to the seasonally adjusted data from the Bureau of Labor Statistics.
Considering the role the housing market has played in the economy in recent years, any slowdown in the volume of home sales or home price appreciation could weigh on future economic growth. For example, to have a positive effect on consumer spending growth, mortgage equity withdrawals must continue to increase, not decline or even level off. And for mortgage equity withdrawals to continue rising, home values have to rise as well in order to generate unrealized gains for homeowners that can then be turned into cash through the equity withdrawal process. As house prices become more expensive relative to the cost of renting, further price appreciation will become more and more difficult.
In 2005 most of the commenters on the real estate market were saying there’s no bubble and our mini boom would never end, this is a sure sign that an end is fast approaching.
Stephanie
San Diego California Plastic Surgeon