Young Workers Waiting for a Stronger Economy
With unemployment especially high among the young, more people are going back to school, and that suggests a new niche market for builders and developers in college housing, Sam Chandan, president and chief economist of Real Estate Economics LLC, told a PCBC audience in San Francisco on June 17.
Today’s dismal job market is pointing up the financial advantages of a college education, he said, with a 4% unemployment rate among workers holding a bachelors degree compared to 15% among those who don’t have a high school diploma.
“People who can’t find work are going back to school,” Chandan said. At the same time, “colleges won’t be able to provide housing themselves” because of tight budgets and state and local government cutbacks, creating an opportunity for builders in the private sector.
While the young constituents of Generation Y will eventually breathe new life into the nation’s housing market, for now their presence is being felt primarily in the rental sector. A full three-fourths of Americans in their early to mid-20s are renters, Chandan said; 15% of the members of this age group have moved back home and that is likely to increase to 20% by year’s end.
While unemployment for more experienced workers in their mid-30s and older is generally in the 5% to 6.5% range, he said, “no new jobs are being created for young people. Opportunities for young people are not opening up.”
Affordable home prices and tax credits have helped stimulate demand among first-time buyers, he suggested, and the recent climb in mortgage rates above 5% has motivated some to hop off the fence, “but downpayment constraints have returned” for many attempting to attain homeownership. “People can be paying as much in rent as they would be for owning,” Chandan said, “but they can’t enter” the ranks of the nation’s home owners.
And while the Federal Reserve's efforts to ensure the availability of low-priced mortgages has helped home buyers in some parts of the country, it is “not sustainable for the government to support homeownership” this way because it will eventually run into limitations in its ability to bring more credit into the market, he said.
“We do need Fannie Mae and Freddie Mac to remain extremely active six months from now, because banks won’t be in the position to take over their role; they will continue to remain supporters of housing,” he said.
Still struggling with foreclosures, banks are also beginning to see a surge in problems with their commercial loans. “Banks will have a difficult time relieving themselves of toxic assets,” Chandan said.
In the meantime, investment in housing is on the increase, “driven by the sense that pricing has reached rock-bottom relative to where prices will eventually stabilize,” he said, and by the perception that home values have been driven “below the underlying fundamentals of these assets.”
Chandan said he expects to see the economy begin to slowly pull out of the recession by the end of this year or in early 2010, and he predicted there will be greater stability in housing markets where unemployment is stabilizing.
Household growth will be needed to absorb all of the excess housing stock, and “at the end of the day that is a function of job creation.” Ft. Meyers in Florida “will take a decade” to absorb its empty housing units, he said, and “other parts of the country will be relatively quick.”
Chandan noted that the increase in household savings rates since the debacle in the financial markets last September will constrain spending in the short run, but it will put consumers in a stronger position two to three years down the road. And he voiced concern about the possible resurgence of inflation and interest rates in light of the current magnitude of government expenditures.
Coming Back Faster Than Expected
Looking on the brighter side, Fareed Zakaria, author of “The Post American World,” told PCBC attendees that he expected the U.S. to respond positively to the need to reduce its debt and he said it would apply its world dominance in technology to achieve “genuine growth from productivity.”
He called the current recession a “wake-up call” that the nation needs to work off its debt over the next 25 years. “We do not have to solve the problem tomorrow. We need to be turning the arrow to the right trajectory.”
“This recession is not all a consequence of evil doing and failure,” he added, “but of success.”
Zakaria reminded his audience of how Fed Chairman Paul Volker gave the economy “a painful dose of medicine” to unwind the inflation of the late 1970s around the world. “Today, Zimbabwe is the only country with hyperinflation,” and “enormous economic stability” has resulted. “Inflation is more disruptive than unemployment; it destroys savings, what you already have,” and is especially damaging to the middle class, he said.
Zakaria also cited the transformation in the middle of this decade of non-Western parts of the world that has brought one to two billion people into the global economy. “We have never had the expansion of capitalism like today. It is a good news story, giving people the opportunity to contribute.”
However, challenges do remain for the U.S. government, he said, which will be required to resolve its inability to impose “short-term pain for long-term gains” and raise taxes to pay for its rising expenditures.
In the meantime, “this is not the end of the world. We will come back faster than you realize,” he predicted.
“The collective response of what people are doing to recover, that is what changes society….We are far more resilient than people realize,” he said.
Tax Credit Web Site Looks at Opportunity of a Lifetime
Builders and other industry professionals can help spur home sales by referring prospective first-time home buyers to www.federalhousingtaxcredit.com. The NAHB Web site provides detailed information on the $8,000 federal tax credit for first-time home buyers included in the economic stimulus legislation signed into law by President Obama.
Consumers can use the Web site to find information on the tax credit — including a detailed question and answer section. It also includes information about other housing-related and small business measures in the legislation and a number of home-buying resources for consumers.
Spanish Version Also Available Online
A Spanish version of this increasingly popular Web site is also available to provide detailed information on the tax credit to Spanish-speaking first-time home buyers.
Industry professionals are encouraged to highlight either tax credit Web site when marketing to their potential first-time home buyer market.
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