Every homeowner has surfed the web to get a sense of housing values in the neighborhood. The plunging home prices continue to put a drain on the economy. The lowest mortgage rates in history have not been a big enough bonanza for many prospective home buyers to take advantage of the unparalleled combination of historical rates and attractive home prices. How much does real estate contribute to the economy is open for debate. Some pundits say as little as 10% and other economist estimate as much as 20% of the economy is real estate related. Housing has a domino effect on the economy. A decline in real estate sales will eventually lead to a decline in home prices. This then reduces the amount of home equity loans the homeowner can get, which in turn, reduces consumer spending.
Nearly 70% of the United States economy is based on personal consumption. The reduction in consumer spending contributes to a downward spiral in the overall economy. Going back recently to 2002-2004, homeowners who refinanced their mortgages took out an astronomical $400 billion in cash, most of which was pumped back into the economy. That's no longer a source for most home owners and has put a crimp in additional spending. The only good news with the lower home prices is it lessens the chances of higher inflation.
It has been taken for granted that turning around housing is key to turning around the economy. It's no coincidence that as home sales and prices tumbled, so followed the economy. How big of a drag has housing been on the economic recovery? The answer is that housing has been a huge contributor to the slower recovery. Turning the housing market around would add a significant boost to the economy with lower unemployment rates and the jobs created through more construction.
During the housing bubble of the mid 2000′s, home builders spent over $600 billion a year on land, materials and employee salaries. There are many other ways that the housing market boosted the economy in the past decade. The wealth effect comes to mind, when housing prices are rising, people just feel richer. Four years after the recession officially began in December 2007, economists, businesses and consumers alike have expressed a growing optimism about the recovery in recent weeks.
The housing market is slowly ticking up mostly due to young adults who have been living with their parents that are moving into their own homes amid stronger job growth. The inventory of new homes has reached a record low, at some point we need to ramp up home building in a big way. After adding nothing to the economic growth over the last six years, the expectations are housing will finally be a meaningful contributor to the overall economy in 2012.