Will a Recession Affect Your House Sale?

Defining Real Estate and Its Economic Effects Real estate comprises many important aspects of economic activity. When combined together these notions have both direct and indirect impact upon the economy.  Also, real estate sector has both direct and indirect effect on the level and composition of real Gross Domestic Product (GDP). The essence of the real estate sector can be defined in many ways. The country will concentrate its activities primarily on private construction activity as well as on flaws that might occur with the GDP accounts.  

The definition is really hard to understand, since it encompasses construction activity that serves both the business and household sectors. A household’s residence is the largest asset own by the country. That is the main reason why it is so important to understand the recent trends in the value of household real estate wealth.

The home-based "wealth effect" is known to have earned millions of home owners. As a result, thousands of dollars have been spent on managing the whole issue. Americans are likely to go well through recession process. However, the recession is projected to have a negative effect on the whole nation.

The latest surveys that have been carried by Washington, D.C.-based National Association of Realtors Home Wealth just proves the righteousness of the above mentioned statement. Effect Survey that has been released during the period of recent convention in Chicago mentions the following fact: the typical homeowner now has $50,000 in home equity. About $100,000 for households show the tendency to earn more than $75,000. The situation is especially true for baby boomers, who are aged 50 or older. These people are known for still earning more money on the house – about $80,000. The analysis of California and New England areas show the following: home-earned equity is still more than it was during the previous times—(it was about three, four times as much and higher).

The majority of the owners show the tendency to use equity to move up to a larger home or buy a second home. NAR report shows that the investments of the bank are predominately used to invest and to pay off debts. The expenditure amounts to the degree of consumer spending when the economy is being kept churning.

According to NA, the investments into home equity can protect Americans from the economic recession. But this protection is only partial. The buildup of home equity can protect Americans from the economic downturn. According to Dr. David Lereah, NAR's, chief economist: "Homeowners use their home equity to get cash for emergencies as well as the purchase of big-ticket items." [1] The recession proved to bring no profits. Under such circumstances, home owners “didn't have the added financial benefit of tax-free income.” [2]

The sale of the home is not the way out. The capital gains go to down payment funds for most repeat buyers. Still, according to Coldwell Banker, home ownership can be regarded as a “good financial insulator against a cool economy.”[3]

Let’s analyze the other recessions. The OPEC oil embargo that had a place during October 1973, has lead to high unemployment and inflation. The process helped to boost inflation. The recession has been sustained during the years 1982 and 1983. It was the time of a widespread drop in stock market values. The problem was especially big during 1987. The case shows how real estate can protect people from the economic storms. November 1973 can be characterized by the drop in approximately 14 percent. This tendency has occurred during the previous month. By 1976, but new home sales nearly doubled as to compare with the previous season.

The last sustained downturn was registered to take part during the 1980 to 1982, It was the time of the highest rates of unemployment in recent history. In June 1983 the unemployment rate has reached about 10 percent of the general sales. It was the time of high unemployment. During that period, home sales actually increased 51 percent year over year. The research proves the tendency to sell home assets. About 412,000 new homes were sold in 1982 to 623,000 in 1983. The fact has been reported by Coldwell. The analysis of the market shows that "Residential real estate was bound to ease off the pace from earlier this year.” The application of this strategy helped to stabilize the situation that is already present at the equity market. The research proves that the equity markets show the tendency to stabilize the interest rates. These remain low, but are expected to live through the long period of reduction in home sales. This idea has been once voiced by Alex Perriello, Coldwell's president and CEO. [4]

Housing has all rights to be regarded a good investment opportunity. It also can inject new resources at the economy, thus assisting it with the new financial support. The demand is caused by the increased population. Its number has amounted to 30 million people during the period of the last 10 years.

The influx of immigrants shows the tendency to look for new homes. The situation is largely reasoned by the fact that the well-off baby-boom generation is moving up and buying second homes. These require a low mortgage rate. These are used to help to boost the demand.

 The reasons of the Crisis

The recent crisis in the real estate industry is caused by a number of reasons. One of these is the unhappy liaison that has existed in a frenzied nationwide real-estate market. Being centered in California, as well as in Las Vegas and Florida the recession threaten to evolve itself into a “nationwide credit mania”. The center of the crisis located in the New York City. The brand name that helped to personified these twin bubbles was Starbucks. The company has all the chances to be regarded as the Seattle-based coffee chain. The development of the chain was followed by new housing developments that slowly developed into the suburbs and exurbs. The outlets of the company are known to become pitstops for real-estate brokers and their clients. The business was also carpet-bombed the business districts of large cities. It was especially true for a number of financial centers that have been gathered around the city of Manhattan. Starbucks is also known for providing the fuel for the boom. What the company did can be described in the following manner: “the caffeine that enabled deal jockeys to stay up all hours putting together offering papers for CDOs helped mortgage brokers work overtime processing dubious loan documents.” The company is known to locate many of its outlets on the ground floors of big investment banks. One of these has been located around the corner from the former Bear Stearns headquarters. Now the headquarters of the company are being closed. Just in the same manner as American financial capitalism, Starbucks, was known to fuel a number of capital markets, thus taking the great idea so far.[5]

One of the mistakes done by the company were the wrong operation on the market. The whole philosophy looked in the following manner: "build it and they will come". As a result, the algorithms and number-crunching went over a sound judgment. The analysis that was done by Starbucks helped to reveal the presence of so called “opposite corner”. The opposite corner was supposed to sustain a new outlet. The company has reached its peak during the spring of 2006. Since those times, the numbers were known for falling substantially.  

America's financial crisis shows the tendency to globalize at the high speed. The market became global during the last months. Also, there is quite a big number of European and Asian governments that show the tendency to rejoice over America’s financial downfall. The downfall in the United Stated has lead to the expansion of the depositors' insurance. The majority of the banks are known to be feasted on American subprime debt. The other measure taken is the practice of shoddy risk-management cues from their American cousins. A great number of the countries whose financial sectors were connected with the U.S financial system have been also touched by the crisis. The situation is typical especially for those countries, whose financial institutions plunged into CDOs, credit default swaps, as well as whole catalog of horribles.[6]

At present, the local real estate market is down about 9%. It is eventually low than during the recent years. Also, there is a 9% decline in the numbers of closed sales. Under such circumstances, people must be very smart while selling their houses. People have to develop a special attitude to selling their houses. While doing so they have to be smart. People have to compare the prices. The best alternative is to look closer at the first six months of last year prices and compare these numbers with the numbers that have been obtained during the past six months.

The final question in this paper looks as the following: How Does Real Estate Affect the U.S. Economy? Let’s change the question in the following way: how does real estate affect the U.S. economy?

The recent research shows that the real estate contributes 10% of the total U.S. economy's output. In the case of decline in, the same happens to the construction jobs. The situation has a potential threat to further market development. The major threat is the increasing unemployment rate among the major part of the Americans.

A decline in real estate sales is also projected to have a negative outcome thus leading to a decline in real estate prices. The analysis of the situation can help to reduce the value of everyone’s homes, no matter whether these are sold or not. The amount of home equity loans was also reduced. That fact has led to the reduction in consumer spending. Over 70% of the U.S. economy has proved to be based on personal consumption.

A reduction in consumer spending will contribute to a downward. That downfall is spiral in the economy. The whole situation is rather aggravating since it leads to further high unemployment rate. The other negative outcome is the reduction in consumer spending. In case the Federal Reserve doesn't intervene (by reducing interest rates) the country may experience one more terrible recession. As for the lower prices for home these can hamper the growth of inflation.

                                                  References:

Perkins B., Real Estate's "Wealth Effect" Insulates Against Recession. http://realtytimes.com/rtpages/20011116_wealth.htm

 Leamer, Edward E. “Housing and the Business Cycle,” Paper Presented at a Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, Aug. 30-Sept. 1, 2007.

Zarnowitz, Victor. “Theory and History Behind Business Cycles: Are the 1990s the Onset of a Golden Age.” Journal of Economic Perspectives, Vol. 13(2), Spring 1999, pp. 69-90.