I have posted the chart on the lack of owner-occupant demand dozens of times to remind everyone that current demand is far weaker than what’s widely reported. But that’s not to say demand will remain weak forever. There is latent demand from two large groups that currently can’t buy homes: the credit impaired and the unemployed.
The millions of former owners who have damaged credit from either a short sale or foreclosure represent a large reservoir of future demand. When these people save for a down payment, wait out any mandatory waiting periods, and regain their credit scores, most of them will chose to buy again despite their previous bad experience with home ownership. For this group, it’s only a matter of time and fiscal discipline. We will start to see more and more of these former owners re-enter the housing market over the next decade.
The other group of potential buyers may be even larger: the unemployed. It’s an old adage that the unemployed don’t buy houses. Actually, during the housing bubble, the unemployed did buy houses using NINJA loans, but the near 100% default rates made those loan programs disappear. In the real world of sustainable housing finance, the ability to repay the loan is important, and a job is necessary to repay the debt. The reported 8.1% unemployment rate reflects millions of unemployed job seekers. However, that does not capture the four million people who, according to the government counting methods, have given up searching for work. These so-called discouraged workers also want jobs, and when the officially and unofficially unemployed go back to work, they represent a significant pool of future home buyers.
(Reuters) – When Daniel McCune graduated from college three years ago, he was optimistic his good grades would earn him a job as an intelligence analyst with the government.
With a Bachelor of Science degree from Liberty University in Virginia, majoring in government service and history, McCune applied for jobs at the National Security Agency, the Federal Bureau of Investigation and other agencies.
But after a long hunt that yielded only two interviews, the 26-year-old threw in the towel last fall, joining millions of frustrated Americans who have given up looking for work.
“There’s nothing out there and there probably won’t be anything for a while,” said McCune, from New Concord, Ohio. He has moved back home to live with his parents, who are helping him pay off his college debt of about $20,000.
“I don’t like it, it’s embarrassing. I don’t want to be a burden to my parents,” said McCune, adding that he felt like a high school dropout.
If he had graduated prior to the collapse of the housing bubble, he could have purchased a home and squatted there instead.
Economists, analyzing government data, estimate about 4 million fewer people are in the labor force than in December 2007, primarily due to a lack of jobs rather than the normal aging of America’s population. The size of the shift underscores the severity of the jobs crisis.
If all those so-called discouraged jobseekers had remained in the labor force, August’s jobless rate of 8.1 percent would have been 10.5 percent.
Those 4 million people should be counted. The notion of “discouraged workers” is nonsense made up by the government to make the unemployment numbers look better than they really are. These discouraged workers would start searching again if jobs became available in their area or in their field.
The jobs crisis spurred the Federal Reserve last week to launch a new bond-buying program and promise to keep it running until the labor market improves.
Do you realize the federal reserve has made a public commitment to print money until we regain full employment? Can we really print our way to prosperity?
It also poses a challenge to President Barack Obama’s re-election bid.
The labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one has fallen by an unprecedented 2.5 percentage points since December 2007, slumping to a 31-year low of 63.5 percent.
“We never had a drop like that before in other recessions. The economy is worse off than people realize when people just look at the unemployment rate,” said Keith Hall, senior research fellow at the Mercatus Center at George Mason University in Arlington, Virginia.
The participation rate would be expected to hold pretty much steady if the economy was growing at a normal pace. Only about a third of the drop in the participation rate is believed to be the result of the aging U.S. population.
It isn’t retirement, it’s persistent unemployment.
The economy lost 8.7 million jobs in the 2007-09 recession and has so far recouped a little more than half of them.
Economists say jobs growth of around 125,000 per month is normally needed just to hold the jobless rate steady.
Given the likelihood that Americans will flood back into the labor market when the recovery gains traction, a pace twice that strong would be needed over a sustained period to make progress reducing the unemployment rate.
Last month, employers created just 96,000 jobs. …
… But separate surveys by the Economic Policy Institute (EPI) and Generation Opportunity found little evidence that young people were going back to school when unable to land a job.One deterrent is the rising cost of education and record levels of student debt. About two-thirds of 2012 college graduates left school in debt, owing on average $28,700 in student loans, according to Mark Kantrowitz, publisher of FinAid.org.
“Young people dropping out of the labor force to go back to school would be a silver lining if it were true,” said Heidi Shierholz, a senior EPI economist, adding that enrollment had gradually been increasing for decades.
A Generation Opportunity survey published in August showed a third of young people were putting off additional training and post-graduate studies because of the sour economy.
“This is significant. People are making the decision to put those off because the assurance of a return to investment is not there,” said the non-profit’s Conway, a veteran observer of the labor market as a former Department of Labor chief of staff.
I know a guy who went back to school in 2008. Now that he’s out with his masters degree, he still can’t find a job. He invested a great deal of time and took on a lot of debt, and so far he has obtained no benefit. I’m sure he is not alone.
The persistent unemployment is holding back the economy and the housing market. The only silver lining in this cloud is that these people represent a large pool of potential buyers if they ever go back to work.
Losing the ATM was like losing a job
During the housing bubble, the Ponzis came to rely on the income provided by their houses. When house prices collapsed and the housing ATM was turned off, it was just like losing a breadwinner in the family. The former owner of today’s featured property must be mourning the loss of this breadwinner as it was quite a good provider.
- This house was purchased on 7/10/2002 for $529,000. The owner used a $423,200 first mortgage, a $100,000 second mortgage, and a $5,800 down payment.
- On 7/31/2003, he refinanced with a $491,200 first mortgage and a $61,400 stand-alone second.
- On 6/24/2005 he refinanced with a $800,000 first mortgage and a $75,000 HELOC.
Total mortgage equity withdrawal was $351,800 in only three years. This man only put $5,800 down, yet he managed to extract over $100,000 a year in supplemental spending income.
Right now he is likely unable to buy due to a trashed credit score, but I think it’s safe to say he will want another house when he can qualify again.
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Proprietary OC Housing News home purchase analysis
$617,500 …….. Asking Price
$529,000 ………. Purchase Price
7/10/2002 ………. Purchase Date
$88,500 ………. Gross Gain (Loss)
($42,320) ………… Commissions and Costs at 8%
$46,180 ………. Net Gain (Loss)
16.7% ………. Gross Percent Change
8.7% ………. Net Percent Change
1.5% ………… Annual Appreciation
Cost of Home Ownership
$617,500 …….. Asking Price
$123,500 ………… 20% Down Conventional
3.51% …………. Mortgage Interest Rate
30 ……………… Number of Years
$494,000 …….. Mortgage
$116,152 ………. Income Requirement
$2,221 ………… Monthly Mortgage Payment
$535 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$154 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$90 ………… Homeowners Association Fees
$3,001 ………. Monthly Cash Outlays
($347) ………. Tax Savings
($776) ………. Equity Hidden in Payment
$138 ………….. Lost Income to Down Payment
$97 ………….. Maintenance and Replacement Reserves
$2,113 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$7,675 ………… Furnishing and Move In at 1% + $1,500
$7,675 ………… Closing Costs at 1% + $1,500
$4,940 ………… Interest Points
$123,500 ………… Down Payment
$143,790 ………. Total Cash Costs
$32,300 ………. Emergency Cash Reserves
$176,090 ………. Total Savings Needed