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Real Estate Market Commentary - October 2011
by Peter L. Zachary, MAI, MRICS

Commentary on the Real Estate Market as of October 2011 By Peter L. Zachary, MAI, MRICS

The October 19, 2011 issue of the New York Times had a front page article entitled "Gloom Grips Consumers; It May Be Home Prices". The article talks about a man named Ernest Markey of Orlando, Florida. Due to the poor economy, he lost his stone-cutting business in 2009 and then sold his home for $500,000 less than it was worth at the peak of the housing market. They moved to a smaller home in a less affluent neighborhood and gave up two new cars and bought a used car. They are surviving but they do not expect that they will ever recover financially from the loss of the equity in their home. The third paragraph of this article sums up everything Ernest and almost all Americans feel. It stated: "The United States has a confidence problem: a nation long defined by irrational exuberance has turned gloomy about tomorrow. Consumers are holding back, businesses are suffering and the economy is barely growing."

"There are good reasons for gloom - incomes have declined, many people cannot find jobs, few trust the government to make things better - but as Federal Reserve chairman, Ben S. Bernanke, noted earlier this year, those problems are not sufficient to explain the depth of the funk. That has led a growing number of economists to argue that the collapse of housing prices, a defining feature of this downturn, is also a critical and underappreciated impediment to recovery. Americans have lost a vast amount of wealth, and they have lost faith in housing as an investment. They lack money, and they lack the confidence that they will have more money tomorrow. Many say they believe that the bust has permanently changed their financial trajectory. ‘People don't expect their home to regain value, and that's really led to a change in consumer attitudes about the economy that we've just never seen before,' said Richard Curtin, a professor of economics at the University of Michigan who directs its Survey of Consumers. The latest data from the survey, released Friday by Thomson Reuters, shows that expectations for economic growth have fallen to the lowest level since May 1980."

The article further discusses how economists are starting to spend time on the relationship between housing prices and consumer spending. It stated:

"Economists have only recently devoted serious study to how a decline in housing prices affects consumer spending, not least because this is the first decline in the average price of an American home since the Great Depression. A 2007 review of existing research by the Congressional Budget Office reported that people reduce spending by $20 to $70 a year for every $1,000 decline in the value of their home. This "wealth effect" is significantly larger for changes in home equity than in the value of other investments, such as stocks, apparently because people regard changes in housing prices as more likely to endure. A recent paper by Karl E. Case, an economics professor at Wellesley College, and two co-authors estimated the decline in home prices from 2005 to 2009 caused consumer spending to be $240 billion lower in 2010 than it otherwise would have been. That figure is equal to about 1.7 percent of annual economic activity, enough to be the difference between the mediocre recent growth and healthy growth. And it does not include all the other effects of the housing crash, including the low level of new home construction, that are also weighing on the economy."

This article in the Times talks about the travails of small business. It talk about Milcarsky's Appliance Center in Longwood, Florida which went from 26 employees 3 years ago to 12 employees today. The article states:

"It remains the prevailing view of economic policy makers that economic activity will eventually return to the same trajectory as before the recession. Mr. Bernanke and others have said that they see no evidence of any permanent change in the economy. Previous bouts of economic pessimism, as in the early 1980s and early 1990s, went away once growth picked up."

However, this is a very hard pill to swallow in these trying economic times. One of the basic principles of appraising is the principle of change. Things are always changing and therefore values are always changing. Unfortunately change may occur at such a slow rate that it is not discernable. Thus pessimism rules in today's market.

Read previous Real Estate & Housing Market News.

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