The current real estate market is much like a Rubik’s cube. Once you think you have it figured out, you look at it from another angle and find out you still don’t have it right. There are many factors complicating the current market. I want to address one of those factors today – UNEMPLOYMENT.
When trying to determine value of any item, we know that there are two components: supply and demand. Let’s look at how unemployment impacts both of these.
DEMAND
It is rather easy to understand the concept that a person without a job will be unable to purchase a house. Therefore, as unemployment rises, more and more potential purchasers are removed from the market resulting in a decrease in demand. How big a decrease?
Let’s look at the severity of unemployment in today’s world. Below is a graph from Google showing the unemployment rate in this country from 1990 to the present:
As you can see, there has been a surge in the last two years. (You can visit here to find the increase in your state).
Historically how does this compare to former recessions? Here is a graph from Calculated Risk that addresses this point:
Bottom line: More and more potential buyers are being removed from the housing market thereby decreasing demand significantly.
SUPPLY
This is perhaps the more troubling consequence of unemployment. The Wall Street Journal in an opinion piece over the weekend discussed the depth of the unemployment issue:
It’s especially distressing to see that the number of long-term jobless—those out of work for 27 weeks or more—jumped again to 6.55 million, and as a share of the total jobless hit a new record of 44.1%, up from 40.9% in February and 24.6% a year earlier. This means that nearly one of every two Americans who have lost his job is waiting at least a half year to get a new one.
How this number compares to previous years is illustrated in the surge at the right in the graph below:
How many of us could afford to continue to pay the mortgage payment if we were out of work for over six months? And that is exactly the problem. More and more families cannot make their house payment. As the Journal reported in an article last week:
More borrowers fall behind as they lose their jobs, especially when they owe more than their homes are worth. Indeed, the surest way to stem foreclosures at this point is to reverse job losses, something the administration likely knows all too well.
A report from Freddie Mac last week shows that job losses drove the vast majority of missed payments last year among prime borrowers, or those who have good credit. Freddie Mac said that 58% of its borrowers who went delinquent last year cited unemployment or reduced income for missing payments.
Bottom Line: While unemployment remains, the number of homes entering foreclosure will increase.
What does this mean to you?
Pricing is about supply and demand. Unemployment is obviously diminishing demand. It also will be increasing the future supply of distressed properties coming to the market at discounted prices. If you are thinking of selling perhaps now is the time. If you are thinking of buying, waiting could be an option as long as you keep your eye on rising interest rates.
