It’s a vicious circle we’re stuck in folks. Home prices won’t go up until there are more jobs, but there won’t be any more jobs around till the housing market recovers.
This is a big problem because right now, both the broader economy and housing markets are struggling to get into gear. With hiring losing steam and home values hitting new lows, many observers are predicting even more declines in home prices.
“The economy might be able to improve a little without housing, but it certainly won’t be able to flourish and bring down unemployment levels significantly unless housing revives,” said Moody’s Analytics Mark Zandi.
Along with the mortgage giants Fannie Mae, the biggest brains at Moody’s Analytics are forecasting that home prices will drop even further, by another 5% by the end of 2011.
However, some economists think that a recovery is even further away than they think. Dean Baker of the Center for Economic Policy and Research is one of them, and Barry Ritholtz of Fusion IQ is another. They are both of the opinion that current home prices are as much as 12% overvalued.
“Right about now, real estate is what we call a falling asset class,” said Ritholtz.
Throughout history, it has usually been the housing markets that lead the economy to recovery, through the surge in construction and the new jobs that brings, and also the high demand for products and services needed to make a happy new household.
“A broken housing market freezes the whole economy,” says Ritholtz.
Baker is also worried about what will happen. “Housing was so important to previous recoveries, but today it isn’t happening. I don’t really see any other way though,” he admitted.
On the other side of the card, we have Doug Duncan, an economist with Fannie Mae. He is more concerned about the impact of housing on jobs, and vice versa.
“We’ve said all along, it’s vital we raise employment levels,” says Duncan. “Until employment grows, income won’t grow, and so housing markets won’t grow.”
Duncan is now looking forward to the monthly unemployment report from the government this Friday. He says that if the economy slows down again, he will have to yet again push back the date of an expected housing recovery to begin.