President Obama and many of the nation’s top economists entered 2014 predicting a breakout year for the economic recovery. However, troubles in the housing sector indicate more difficulties and several more years of mediocre growth lie ahead.
Residential construction only directly accounts for 3 percent of GDP; however, the vitality of the new and existing home markets importantly influences the economy in other, indirect ways. Home prices significantly impact on consumer confidence and household balance sheets, and in turn, determine American inclinations to spend at the malls, visit new car showrooms and power broader growth.
For sure, an exceptionally cold winter has discouraged prospective homebuyers—traffic in new home showrooms, housing starts, and new and existing home sales are all way down—but subzero temperatures and snow can hardly account for all the chill gripping the market these past several months.
For many good reasons, housing sales and prices may never fully recover to pre-crisis levels, and the U.S. housing market and the broader economy are now permanently downsized.
Since 2001, the economy has created only 30,000 jobs a month, whereas at least four times as many are needed to keep up with population growth. A historically staggering one out of six men between the ages of 25 and 54 are without jobs and many are without any prospects of gaining meaningful employment.
Many young graduates are stuck in low wage, dead end positions and many only in part-time employment. Wages are stagnant or falling, and too many young people are saddled with huge student loans that will take a decade or more to pay off. Like the rest of us, many are burdened by government-mandated higher health insurance costs and rising taxes.
Consequently, although homes remain reasonably affordable as measured by household income, the disposable income young people have to enter the housing market has dramatically diminished.
So far the housing recovery has been helped considerably by speculators scarfing up foreclosed homes, foreign investors looking for safe havens for capital, and the small percentage of Americans who have done well—and often who put up considerable amounts of cash.
Further exacerbating these problems, the Dodd-Frank financial reforms have needlessly made mortgage lending by small and medium sized regional banks more difficult and costly.