Housing Market to Economy: "I'll Stop When You Stop"

As it turns out, reality isn't nearly as much fun as bubble-induced mania.

New data on home prices show that in the 20 largest cities in the United States, prices plunged in March to their lowest point since the housing bubble burst in 2007. According to the Standard & Poor's Case-Shiller Index, home prices are worth a full third less than they did at their peak in April 2006, eliminating nearly all the real gains in home prices since early 2000.

Prices continue to fall because of a glut of available homes, but also because of a paucity of jobs. With nearly one-in-ten workers still unemployed -- and many more working fewer hours than they would like -- families do not have the income or available credit to buy a house, even at the current bargain rates. And of those who already own one, a near-record high of 23.1 percent of them are sitting on a house that's "underwater" -- that is, the value of the mortgage is greater than the value of the house.

At this point, with much of the bubble popped, falling home prices are a direct consequence of the lack of jobs recovery. Policymakers should not prop up house prices at bubble levels. Not only would this be unsustainable, but it prices homes out of reach for too many families. But, housing's lack of a rebound poses a challenge for the now two-year-old economic recovery.

We are now two years into the economic recovery. After 25 months of shedding jobs, and a total of 8.7 million lost, the United States stopped hemorrhaging jobs by the summer of 2009 and employers have added workers to their payrolls for seven straight months.

Even so, the unemployment rate remains around 9 percent, and finding new work remains tough. There continue to be more than four workers vying for every job opening. The share of the unemployed who are long-term unemployed, that is, out of work and searching for a job for at least six months, has hovered above 40 percent for a year and a half--highs not seen since the Bureau of Labor Statistics began tracking this data in 1948.

And, those with a job aren't seeing their wages keep pace with inflation and many are working fewer hours than they would like, lowering their weekly take-home pay.

Month after month of such unpleasant labor market data should focus our attention on the reality that our economy remains out of sorts. But, it has been hard for many people to wrap their heads around the deep, lingering problems of the Great Recession. In a New York Times article about the new housing data, David Streitfeld wrote:

Many of those in the business of building and selling houses believe the current disaffection with real estate will pass. After every giddy boom comes the hangover, they acknowledge, but that deep-rooted desire for a castle of one's own quickly reasserts itself.

If only things were that simple. Wanting a house (or anything else) is not the same thing as being able to buy a house. You need to have the money to do so. There may be a deep-rooted desire for that castle, but it will remain a fantasy unless you have some cold, hard cash for the down-payment and a line of credit for the mortgage.

As the housing crisis continues, it also becomes less clear how our economy overall will manage a turnaround. Typically, pent-up demand for houses has pulled the U.S. economy out of recessions. The Fed lowers interest rates to spur investment and growth, mortgage and other consumer credit rates fall, and people take advantage of low rates to buy a home, a car, or refinance and spend that extra cash on new clothes and dinners out.

But, that's not the economy we have now. The Fed has kept the federal funds rate--the interest rate it controls--hovering around zero since December 2008. Housing picked up when Congress extended the Home Buyer's Tax Credit, but prices have kept falling, demand remains weak, and foreclosures continue to mount.

Without jobs, American consumers will remain strapped and our economy will suffer from too-little of what economists call aggregate demand, that is, sufficient numbers of customers to get firms to start ramping up production and hiring. We remain an overleveraged nation, and until families have worked their way through their debt, they will not be able to increase consumption, especially if their incomes don't start rising.

The popping of the housing bubble has been painful and prices need to realign with reality. But, even once we've fully popped the bubble, it's not likely that we'll see housing sustain price gains until the job market does.

While many of us may want a new castle, unless there's a fairy godmother close-by, without strong growth in employment and earnings, it isn't going to happen.

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