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From Here to There, Part 2

Before you even start....if you haven't read Part 1, click here.

In Part 1, I discussed the beginnings of a recovery and the fact I am hopeful some good signs are starting to appear in my local real estate market. In Part 2, I will discuss the two things which trump all others when it comes to a real estate recovery.

The third--again, read Part 1 if you missed the first two--and in my opinion, most important piece of the puzzle, is a stabilization of the job markets. I do not believe there can any meaningful recovery until businesses are done getting their houses in order (pun intended...). The uncertainty in the labor market plays directly into the psychology of potential homebuyers (i.e. their fear). Locally, where so much of the economy is tied to the financial industry, there are two elements to this stabilization. One, bonuses are going to be nowhere near what existed in the past for both the immediate and foreseeable future, particularly with the likelihood of legislation or other government restriction on bonuses. Bonuses were gasoline on the real estate fire and that particular lack of fuel is going to hinder a quick recovery. People will need to adjust lifestyles, which in some circumstances, will force the sale of larger homes, increasing that supply. I think this will have a significant impact on the upper reaches of the market.

Two, the significant loss of jobs must be absorbed by the economy. The massive layoffs announced last week are hopefully the beginning of the end of job losses, as most corporations are loathe to cut jobs and when they do, tend to do it in a single, excessive act. (Case in point, banks which cut their mortgage departments are now struggling to meet the demand created by refinances. Most lenders areunderstaffed!) While these layoffs have been announced, many of them have not been implemented and therefore the effects not felt in the broader economy. Best case scenario, things improve and not all the announced cuts take place. Worst case, things are really much worse than anyone anticipates and more cuts are necessary. Unfortunately, I believe only time will solve this problem, but, on the bright side, at least the process has begun, which means it is that much closer to ending.

In normal times, I would conclude by saying these three factors (pricing, psychology and employment) are the key to a real estate rebound and the timing of the recovery rests on where in the cycle you believe we are. For the record, I think we are getting in much better shape on pricing and psychology and haven't quite seen the worst on employment. "These, however, are not normal times", he said, trying to sound like a journalist. There is a HUGE wildcard which will affect the market in ways I'm not willing to predict.

It is an open secret the banking system is broken. I say secret because I don't believe the general public has any sense of how things like the commercial paper market, the money supply, the velocity of money, etc. impact the economy as a whole. I believe structurally, from a macro-economic perspective, things are much worse than believed and the lack of free flowing capital (i.e. $$$$) remains an unsolved problem. In response, the federal government is COMPLETELY reworking and reregulating the country's financial infrastructure. I will leave the debate as to whether or not this is a good thing to others, but, what is important to recognize is no one has any clue what the results of this experiment will be.

Is it good to keep banks from foreclosing? From a human perspective, keeping roofs over people's heads is a good thing but from a financial perspective, does it cripple the banks? Does it prevent the real estate market from reaching equilibrium because supply is artificially lower without foreclosed properties on the market? Do banks never recover becasue investors cannot value banks' mortgage holdings? Do banks not lend because they are afraid to deplete reserves in case they need to write-down their mortgage assets again?

One would think a couple of trillion dollars being thrown at the situation couldn't help but ease the pain, and it very well might in the short or intermediate term. I am concerned, however, about the law of unintended consequences. The government's actions over the past six months are certain to have repercussions which are not intended or anticipated. (As an aside and by way of example, when the government created incentives to allow lower income individuals to purchase homes, it was probably not anticipated banks would lend trillions of dollars without verifying things like job status, income and assets. I have to believe the government was relying upon lenders exercising at least a shred of reason in their lending practices.) Some of these unintended consequences will be positive and some will be negative, some will be small and others large, but the only thing I am certain of is we don't know what they are going to be yet.

Let me conclude by saying I believe we are getting closer to "there." Can I say for a fact the worst is behind us? No. But....do I believe this is a good time to buy a home? Yes, particularly if you see yourself staying put for the next 5 years.

Please leave any thoughts, opinions or criticism in the comments. I would love to hear any or all of it.

Categories: Real Estate

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Bayer & Black, P.C. - Fairfield County Attorney

Wilton Office

195 Danbury Road, Suite 160
Wilton, CT 06897

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Danbury, Connecticut 06810

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195 Danbury Rd., Suite 160 P.O. Box 459 Wilton, CT 06897