Photos provided by Carolyn Forsyth

There are many connected elements in the U.S. Economy. This commentary argues that the key to the U.S. economic engine is housing because it affects local governments(taxes, infrastructure, schools), major industries(finance, manufacturers, retailers, services) and reflects the overall financial strength of the individuals who contribute to this economy.

September, 2017


The U.S. Economic Driver

There is no doubt that the recovery from the 2008 Banking Crisis has been very weak. It doesn’t take much to realize that job growth has been slow and the general loss in manufacturing jobs has had a large impact on the middle class. It seems reasonable to get a handle on what is holding back the recovery.

One factor that needs to be addressed is the length of time homeowners are remaining in a home. Data from Union Bank of Switzerland shows that homeowners are remaining in their homes 50% longer than they were historically.  The median time from Buy to Sell was a relatively consistent 6-7 years prior to 2008.  By 2012 that had grown to 9 years. 

The contributing factors are the number of homeowners underwater in their mortgage versus home value; the lack of job growth; the number of buyers being reduced by the effects of student loans and the new borrower requirements on mortgage lending.  Any one of these can cause ripples in the home purchase activity but the combination has created a serious drag on the overall economy.

Purchasing a new home is an exercise in learning how to write checks with a lot of zeros.  There are so many aspects to the purchase itself and then there is the issue of dealing with new appliances, new window coverings, new rugs, repairs, etc. etc.

All of these actions create action for the economy.  Home ownership has so many elements and the taxes that flow to government from all of these have enormous effects as well.  In prior recessions, the local governments would have to adjust as home prices would generally decline for one or two years while the economy recovered.  In prior times, these lowered prices would create an attractive demand among people who had wanted to buy but were priced out or newcomers moving to the area which previously had seemed too pricey for them.  In general, the local governments would see a return of prior prices and as the economy moved forward, their tax revenues would bounce back to prior levels.

Right now, you can look at the City of Detroit on Zillow and find thousands of homes listed for sale under $10,000.00. Now these aren’t move in ready they are more like bulldozer ready. But consider the implications for the City of Detroit.  How does a city recover with a property tax base that is possibly 25% of what it had been in some areas?  Cities don’t provide services based on what you pay in taxes. Detroit simply can’t be what it was or anything near it.  It will eventually be a relatively small city with an infrastructure that will continue to shrink.

The Banking Crisis of 2008 was exceptionally dramatic because the fraud involved the very institutions that we rely upon for providing capital to business.  With the banks in financial disarray, the Government focused on “saving” them. The expectation was that the banks would quickly recover and get back to business. However, the recovery was hampered by a lot of new regulations that prevented the banks from doing what they had been doing for the last 8-10 years (basically providing loans to buy houses to anyone who could breathe – and I’m not sure that was a requirement). The banks had to retool their lending departments. Fannie Mae and Freddie Mac (the quasi-governmental agencies that actually buy all the mortgage loans) were in disarray as well.  The banks didn’t want to take any risk on mortgages and they couldn’t sell them to the Fannie and Freddie in the volumes that made the banks wealthy so they sat on their hands while things sorted themselves out.  Eventually, Fannie and Freddie reopened their windows but the recovery from the Great Recession of 2008 stretched to 2016. Housing is beginning to recover but the cost has been heavy on cities and homeowners.

Suffice to say that the key to economic vitality in the United States, at this time, is still housing. If Housing Starts, New Home Sales and Existing Home Sales are going well, then the economy, as a whole, should start picking up.