The old cliche’ is well known…”Which came first…the chicken or the egg?” With all the wrangling over how to “fix” housing, the question to ask is “which came first, the job or the house?” After several years of trying one program after another to address the housing crisis, with no sustainable results, housing prices are still falling in many cities, and home sales are bouncing along the bottom, not showing much in the way of real improvement.
The Federal Reserve has attempted to “fix” housing via monetary policy. The FED has thrown so much money at the housing market, you could argue that the FED IS the housing market at this point. Witness the incredible growth in the FED balance sheet, as shown here from the Cleveland Federal Reserve. Note the big brown blob on this chart, labeled “Fed Agency Debt – Mortgage Backed Securities Purch“. And the yellowish blob, labeled “Long Term Treasury Purchases”. Together, they represent the monumental effort the FED has made attempting to revive the housing market and the general economy.
This chart has been nicknamed “the Magma Chart”. And as you can see, if this debt were actually “liquid hot magma”, the entire U.S. would be covered in a layer about 20 feet deep. And there is virtually no sign of this lava flow abating any time soon. No matter how low interest rates are, it won’t stimulate housing sales in an economy that is badly in need of a solution to the employment problem.
During the late 1990’s, when the internet boom was all the rage, my best friend was attempting to explain to her father how people were making money online in “cyberspace” with businesses that did not actually exist, at least not in the traditional sense. Her father, by then a 70-something retiree, and quite a successful businessman who once owned an auto dealership, looked at her in amazement and said “well somebody has got to MAKE something!”
Time has proven that he was quite right. In the years since, the U.S. has seen it’s employment base continue to erode due to outsourcing and manufacturing that has moved over seas for cheaper labor and less regulation. Today China is threatening to overtake the U.S. as the world’s preeminent economic power, by making the TV’s, computers, toasters and blenders that were invented here, and selling them back to us.
While is it true that in past recessions, the housing sector was the driving force behind the recovery, this time it is different. Very few manufacturers are making anything here anymore. And even when they do, they don’t need more humans to get the job done. Since the 1960’s the manufacturing jobs in the U.S. have been slowly eroding over time. Yet economists point out that total production is still near an all time high. This means that productivity gains brought by technology have increased production and output with a much smaller amount of human labor.
The farming sector has seen the same phenomenon. Technology has increased total output with a much smaller labor force. This means that we have a very systemic employment problem that is not going to be solved in the short term. This is the real crux of the issue for the housing market, not interest rates or availability of credit. While getting the housing market going would definitely be good for economic recovery, this time it is different. This time housing is in no shape to lead the country out of the recession.
How many of you remember buying your first home? I don’t know about you, but I distinctly remember having a job first, then after saving some money for a down payment, I went out and bought the house. Come to think of it, I’ve never met anyone who bought a house and then went out and got a job.
Donna Robinson is a 16 year veteran of the real estate industry and a staff writer for Realty Biz News. She is an active real estate investor who also provides coaching and consulting services to individual investors, investment companies, real estate agents and brokers. You may contact her at firstname.lastname@example.org or call her office at 888-915-9968.