A number of economic forecasters are predicting that the overall economy will be sluggish in 2011. The principle reason for this is that a major portion of economic activity is related to the housing industry, and the prospect of a double dip recession in the housing industry seems to be a stronger possibility as time goes on. The main reasons for this dour forecast are the fact that the unsold inventory of homes is very high, job creation overall is weak, the housing market is flooded with foreclosures and has more on the way, and housing prices have been trending down for a number of months. This article will discuss each of these issues.
The inventory of unsold homes on the market is very high. In fact it is about 80% higher than normal. Most housing analysts feel that until this figure is brought down to a normal level it is likely that home prices will continue to drop. Currently the level is about 3.7 million unsold homes. In general, when potential buyers feel that housing prices are going to go down, they will not be motivated to buy and will wait to get a better price.
Everyone is acutely aware that the level of unemployment is very high. This fact is clearly holding down home investments. Beyond this, however, is the fact that even people who hold jobs seem to be lacking confidence about how secure their employment picture is. They are in many cases afraid that one or both spouses will lose their jobs or might have hours cut back. They are afraid that if that were to happen then they would become one of those statistics of people who owned a home but could not afford to pay for it.
A large percentage of the homes that are being purchased are distressed properties, which are either foreclosures or short sales. For various reasons these homes have been hard to move. There is also a large backlog of homes upon which the foreclosure process has begun, but the homes are not yet for sale. This is referred to as the shadow foreclosure inventory. It has been predicted that the number of homes that will be foreclosed upon in the United States in 2011 will be about the same number that occurred in 2010. This number was about one million homes. These homes pull prices down, and until the number becomes closer to normal, the housing market in general will not be normal.
Housing prices looked like they were firming up in the spring and early summer of 2010. It appears this occurred because the U.S. federal government had incentives in place making the purchase of a home attractive for first time buyers. These incentives were extended but have finally run out, so home prices have dropped again in the second half of 2010. Predictions of additional drops of 5-10% are fairly common in housing industry articles and discussions these days.
Interest rates have been at or near historical low levels for much of 2010, but they too have been creeping up in recent months. Despite such low interest rates, the above factors have prevailed and prevented the housing market from picking up steam. Until job confidence and consumer confidence get stronger and the number of foreclosures and unsold housing inventory decreases, we will continue to see the housing industry and the overall economy muddle along in a lackluster fashion.