True. Ultimately housing prices are a function of income since homes are financed by mortgages which require a specific level of income to support. Unfortunately the future outlook for the level of wages and salaries in the United States is not good, even if the economy begins to generate new jobs.
It is likely new jobs will be at lower wages than the jobs eliminated from the economy over the past two years. If cap and trade legislation passes, expect the rest of US manufacturing jobs to go overseas, most likely to India and China the two nations who refuse to accept restrictions. The wages of those blue collar middle class jobs won’t be replaced in the service economy. Another issue is the white collar jobs eliminated in this recession. Many of those let go in their 50’s and 60’s are retiring at much reduced income levels and will not be coming back to work. Companies have learned that many of these functions can be accomplished by redistributing work or through technology. In cases where incremental headcount is needed, companies will hire younger workers at lower salaries to perform the function. I have observed one company where the CEO seems intent on lower payroll costs by using the current economic system to weed out gray haired middle management and replace the jobs with younger managers at a 20 to 50% reduction in pay. In addition there are hundreds of thousands of jobs in the financial sector that will not be coming back at all. The number of banks and other financial institutions is being reduced. The era of a branch bank at every major intersection is going away along with hundreds of thousands of middle class jobs. Finally, the boomers who remain employed will be retiring over the next decade, moving from job based income to living on savings. They will be trying to exit their large houses but there are fewer income earners coming up behind them to buy the inventory and those potential customers will have lower incomes. Expect demand to be soft for at least a decade as supply exceeds demand and the income levels don’t exist to support the mcmansion phenomenon of the last 20 years.
Taxation will be another factor dampening personal income. The federal government seems intent on dramatically increasing the level of taxation through direct increases in personal tax rates as well as through less overt levies (cap and trade, health care). State and local governments facing the exploding costs of public employee retirement programs will be increasing property tax rates and sales taxes. Higher taxes will mean less disposable income to allocate to housing.
With a rapidly declining manufacturing base, this country no longer has the ability to create the millions of middle class jobs needed to prop up the housing market. Over the long term the market responds to the laws of supply and demand. For the next few years demand is likely to remain low and supply high.
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We have too, too many government millionaires...
All true. Another big problem would be the elimination or reduction of the mortgage tax deduction which is always a possibility.
I see it as very simple common sense that real estate prices have to fall until the average family can afford the average home. Any action to keep this from happening will fail and will only serve to lengthen the recovery.