Real Estate Crash Effects Continue As Drag On Rest Of Economy
One of the worst effects this will have is to further drain money from the public school system, which is funded through property taxes. As strapped homeowners appeal tax assessments, school districts will have far less reliable income. In better times, states could be counted on to pick up some of the slack, but they're in pretty bad shape themselves:
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.
