Ouch! Real Estate Continues to Pinch Natl News

Highflying property prices drove the most-recent economic boom, and a collapse in real-estate values hammered it back down. Now, as the economy struggles to regain strength, real estate is expected to continue to act as a brake, rather than an accelerator.

Despite clear signs of revival in the larger economy, including upturns in manufacturing and consumer spending, the nation's market for homes and office buildings remains mired in foreclosures and oversupply. That imbalance will be worked out over time, but in the meantime, it is slowing the recovery in myriad ways.

Here's how it breaks down:

Less construction means fewer jobs. Construction is a big employer and one of the better-paid sectors for men who lack a college degree. The sector has shed 2.1 million jobs from its peak in March 2007 to April 2010. The 5.6 million construction jobs that are left comprise 4% of U.S. jobs, down from 6% when employment peaked in December 2007.

With the glut of houses, offices and malls already pressuring the real-estate market, many of these jobs will not come back for a while, putting added pressure on unemployment even as growth resumes.

Indeed, construction spending is running 13% below its year-ago level and about 25% below the boom-year peak.

Home owners who once felt rich are feeling poorer. Throughout the boom, consumers used their home equity to borrow and spend as they watched housing prices soar. The ratio of dollars taken out of homes to total personal income—a gauge of how much consumers are pulling out of their homes relative to how much they make in wages and other income—fell the last three quarters of 2009. During the boom years, that ratio got as high as 9% nationwide, according to Moody's Analytics.

While real-estate prices have stabilized, they are unlikely to regain prerecession values for years. That has left many consumers with a pile of debt but not much home equity to be used for investment or spending, a big reason why economists believe recent gains in consumer spending aren't sustainable.

"The housing market, since it was the epicenter of the crisis, is also central to the feeble recovery," says Ethan Harris, an economist at Bank of America Merrill Lynch.

Small businesses aren't borrowing as much. While bigger companies can access the now-recovered market for bonds and other debt, many smaller companies—which are key job generators—use the value of their own property to secure bank loans. As the value of those holdings has fallen, so too has their ability to get loans, crimping investment and hiring at a time when the recovery is gaining steam.

Some 49% of small businesses own at least part of the commercial buildings in which they are located, and the majority of them have mortgages, according to the National Federation of Independent Business. But as real-estate values have fallen, so has this source of equity, limiting how much a bank can lend them.

U.S. nonfinancial companies had $6.3 trillion in real-estate assets at the end of 2009, down 33% from 2007, according to the Federal Reserve. That drop is a big reason why corporations' total net worth fell to $12.9 trillion from $15.9 trillion over the same period.

With the value of collateral so depressed "the ability for many small employers to borrow will be constrained precisely as sales begin to strengthen and new investments are warranted," wrote the National Federation of Independent Business in a recent report on small-business credit conditions.

Lower real-estate values translate into lower property taxes, crimping government spending. State and local governments employ 20 million police officers, teachers and other employees, roughly 15% of the work force and more than in all of manufacturing. But much of the money to provide services and pay employees comes from property taxes, which depend on property values. Even as the economy and job market recover, Local governments are cutting employees as they grapple with the worst budget deficits in a generation.

Property taxes continued to grow through the recession and recovery, in part because local governments calculate the levy based on property assessments that are often years old. Property taxes grew 5.7% to $170 billion in the last three months of 2009 versus the same period in 2008. That won't last as tax assessments catch up with reality.

In California, one of the first states into recession, Santa Barbara County saw its 2009 property taxes decline for the first time since 1978.

Property taxes "have only just begun to slump, meaning that cities and other localities will be contending with increasing budget pressure for the next several years," writes the Brookings Institution, a left-leaning Washington think-tank, in a recent report on local government.

Real estate itself is but a small share of the U.S. economy, but its tentacles are far-reaching.

Unemployable

One of every five men 25 to 54 isn't working.

Even more alarming, the jobs that many of these men, or those like them, once had in construction, factories and offices aren't coming back. "A good guess…is that when the economy recovers five years from now, one in six men who are 25 to 54 will not be working," Lawrence Summers, the president's economic adviser, said the other day.

Demand for workers who haven't much education -- which includes many men, particularly minority-group men -- is waning. A shrinking fraction of them are working. Some are looking for work; some have given up. Some are collecting disability benefits or an early-retirement pension. Some are just idle.

For 50 years, the fraction of men with jobs in what once were prime earning years has been trending down. Over the same decades, the share of women who work has been rising, a significant social change that lately has cushioned the blow of Dad's unemployment for many couples.

Women have suffered less in this recession. They were more likely to be in health care and other jobs that weren't hit as hard as construction and manufacturing. They are increasingly likely to have the education so often required to get or keep a good job these days.

That's good for their families. But will there be good-paying jobs in the future for prime-age men, particularly the ones who don't go to college?

Americans have worried for decades that the economy won't produce enough jobs. But the economy always provided. As farm jobs were eliminated by mechanization, factories hired more. As factories increased productivity and moved work offshore, more Americans got jobs in health care and other services. And the economists said to all those who had been worried about perennial, persistent unemployment: We told you so!

Yet nothing in the textbooks says that the supply and demand for workers will intersect at a wage that is socially acceptable. At the high end, demand for skilled workers and those who rely on their brains will return when the economy does. At the other end, jobs in restaurants, nursing homes and health clubs -- the jobs that are hard to automate or outsource -- will come back, too.

In the middle, there will be some jobs for workers without much education, for the plumbers, electricians and software technicians. But not enough to go around.

Men who in an earlier era would have been making good money on the assembly line are, and will be, working security or greeting at Wal-Mart, jobs that almost anyone can do and thus jobs that don't pay well.

If they're working at all. Today, 6.5 million workers have been out of work for six months or more, and that includes only those who are still looking for work. History suggests the longer they're unemployed, the less likely they are ever to work again. Faster economic growth would help a lot, but won't suffice.

One way to resist these market forces is to reduce the supply of workers who aren't in demand and increase the supply of workers who are. That is, educate more and better: Fix K-12 schools, improve worker-training programs, strengthen community colleges, give more aid to college students. All this is wise, but most of it will take a long time.

Reader's Point Made

"Since quite a large portion of the Real Estate meltdown appears to be the fault of unscrupulous lenders flipping risky mortgages, might it be wrong to encourage legislation that would reattach mortgages to the banks that made them originally"?

Fed: Low Rates Likely Through 2010

Interest rates are likely to remain low into 2011, Federal Reserve policymakers hinted in at least two presentations.

Fed Governor Daniel Tarullo said, "The relatively modest pace of recovery, the continued high rate of unemployment, subdued inflation trends, and well-anchored inflation expectations together suggest that the need for highly accommodative monetary policies will not diminish soon.”

Martha's Stats Flash

U.S. home sales in the first three months of this year increased 34 percent over the first quarter of 2009

Will anyone ever want to live here again?

A dozen bouquets of flowers and a tiny figurine of an angel form a makeshift memorial to Brian Betts, a widely admired middle school principal who was shot to death in his suburban home recently.

The death has been ruled a homicide, and police are still searching for the killer. Meanwhile, some area residents grieving his death are also pondering a bizarre twist: Betts' cozy brick house was the scene of a separate 2002 murder of a man and his 9-year-old daughter.

The real estate agent who helped Betts buy his home in 2003, Therese Cox, told The Gazette, a Maryland newspaper, that Betts learned about the 2002 double murder from a neighbor after the purchase.

Rules about what real estate agents must disclose vary from state to state. Only two – Alaska and South Dakota – require that sellers inform all prospective buyers about a previous murder or suicide. Disclosure laws have become less relevant in the age of Google. In addition to scouring traditional real estate databases, it might be good to conduct a thorough Internet search on a property address as well.

Homes that have been the site of a horrific event such as a murder or suicide usually sell quickly, and a "haunted" property can even have added appeal, some sellers say. Real estate agents and prospective homebuyers across the USA say that's a common view. Stigmatized properties often sell at a discount, though a tragedy actually appeals to some buyers because it gives them a story to tell.

More Keys Homes Selling for Less

The number of home sales in the Florida Keys have continued to increase in 2010, while prices continue to drop.

The average sales price (in the Keys) for the first quarter of 2010 was 14 percent lower than in the same three months of 2009, averaging $417,000. All Keys market areas had a minimum of 10 percent fewer properties for sale at the end of the first quarter of 2010, with Keys West declining by 22 percent to 1,091, down from 1,406 in 2009 and a peak of 1,588 in 2008.

The average sales price of both Key West homes and condominiums in the month of March alone showed gains over March 2009, indicating that the market in Key West is stabilizing faster than other areas of the Keys.

The Middle Keys had the greatest increase in the number of sales, nearly doubling in the first quarter of 2010 the number from the first quarter of 2009. The Middle Keys also had the smallest decline in average sales price at only 2 percent during the same time period.

The Lower Keys had the smallest gain in the number of sales in the first quarter of 2010 over 2009 at 6 percent, but it saw the largest decline in prices, dropping 25 percent.

The Keys also have experienced a notable decline in the number of listings and months of inventory. The first three months of 2009 showed about 4,500 properties for sale throughout the county, compared with 3,800 as of March 31, 2010. Months of inventory dropped from 46 months at this time last year to 28 months currently.