It’s easy to understand that unemployed people aren’t buying houses, thus depriving demand within the real estate market. However, the entire cycle is far more pervasive, and merits a closer look and how it effects your real estate business.
These unemployed people often stop paying their mortgage, their rent, their auto loans, their credit card bills, etc. Thus, as they start losing their homes to foreclosure and eviction, the supply side of real estate spikes upward, at the same time the demand side is dropping.
Tricky part is that also means a rise in rental demand by less than ideal tenants.
Further depressing real estate markets is the fact that foreclosed homes sell for 25-40% less than listed homes for sale, because they are generally sold without an opportunity to inspect the interior of the property (for legal reasons).
The unemployed also stop going out to eat, stop shopping at local businesses, stop traveling, and generally withdraw from the overall economy as much as possible in an attempt to save money. This deprives local businesses of revenues, which leads to even more layoffs and even less hiring.
Now, several years later, the unemployed are starting to quit looking for work entirely. Some of these are reluctantly retiring baby boomers who would not have elected to retire for another 5-15 years, while others are returning to school, and still others are simply giving up and going on the proverbial dole. The unemployment rate today is 8.3 percent, down from 9.5% two years ago, which sounds like an improvement, until looking closer at the numbers.
Based on population growth, America should have seen 4 million people enter the job market (either employed or looking for employment) in the last two years, but instead 1 million people have actually exited the job market. For the first time in 50 years, the number of people in the labor force has shrunk.
There are other problems associated with prolonged unemployment, aside from the devastating effects it has on the rest of the economy and real estate market. The long-term unemployed are losing job skills and grow less “employable” – less desirable to employers – with each month of unemployment.
On the governmental level, public coffers have been hit hard by high unemployment, low GDP growth rates, a stagnating real estate market and increasing dependence on entitlement programs. Local, state and federal government deficits (and debts) are skyrocketing, hampering their ability to stimulate the economy.
It also leads to a strong possibility of rising taxes, which further decreases the amount of capital circulating in the investment engines that power business (and therefore job) growth. The drop in real estate values is a particularly sharp blow to local governments, who collect a major portion of their revenues from real estate taxes.
As landlords, that means what – decrease in cash flow or you may be forced in a position of raising rents in a very sensitive economy.
Finally, credit markets remain tight, because the companies who actually have capital to invest/lend are reluctant to do so, as there are no sectors of the economy that look like sure winners. Real estate markets remain stagnant, so investors are reluctant to put money into mortgage lending, which means it’s hard for homebuyers to qualify, which means fewer people buy houses, which means the market remains soft.
Likewise, small businesses are suffering and stock markets around the world have seen more erratic fluctuation in the last three years than ever before, making them uncertain as well. Thus, many of those who have money are simply sitting on it, waiting for more promising investments to present themselves.
In short, the effects of a battered real estate market and industry, high unemployment, broader economic instability, pinched government budgets and tight credit markets are all self-reinforcing, causing a cycle of economic stagnation. One of the few clear conclusions is that a boost in private sector jobs will increase demand for real estate, offering job growth in the drastically tightened real estate and finance industries, which will push the cycle upward instead of downward. Where those private sector jobs will come from, however, remains a mystery.