The Housing Market, Research Paper Example

Trickle-down effect of the housing market on the commercial real estate market

Introduction

This paper examines the trickle-down effect on the commercial real estate market in the USA.  The current economic situation has created a trickle-effect ( aka ‘the domino effect’). It is important that the business understands these implication in terms of strategic development and long term planning arrangements. In the business of the real estate market there is a general feeling of a slow recovery taking place and the moving away from stagnant market conditions.  A lot of the problems have been due to the artificial elevation of housing prices in a market that was unable to sustain high value mortgages.  This being compounded by the unemployment situation in the USA and the fragility of the job market.

Much of the ability to sustain a successful real estate market is based upon lifestyle and the ability for property purchasers to sustain this.  Areas like Santa Barbara in California have had little impact as growth has been contained and current residents have maintained a degree of reality over the cost of houses.  What has driven the cost of real estate high in California is basically the climate, good job opportunities and a great lifestyle making it one of the most desirable places to live in the USA.  Other places that top the lists for expensive housing are San Francisco, Honolulu, Aspen Colorado etc. Hence it’s all about having a great lifestyle and the capability to pay for it.

Trickle Down Housing

Within real estate it is when costs decline we find that prices do not necessarily follow.  Hence without some degree of protection the quality of life declines.  The Real estate prices are set by the demand of house buyers and this creates the ebb and flow in the value of property money. In a buoyant market it is the demand of buyers to pay more than the asking price which drives others out of the market place. (Chase).

The concept of pricing has been skewed in Southern California because of the wealthy that can afford to buy second and third homes and as such further exhausting the supply of available properties on the market in these areas.  This often prevents less affluent people from moving into these areas and taking up more affordable properties.  It is examples like this that keep the properties prices rising in line with demand.

It is the inability for lower income people to compete in this market place. In the current economic environment more young Americans are becoming disenchanted with the ‘American Dream’ and looking more towards longer term survival models. This often meets looking towards living in rental accommodation, having the ability to enjoy life and travel before plunging into investment into the property market.  In addition it is this concept of land ownership that was so attractive to the ‘baby boomers’ that now seems more alien to younger people who are more focused in on job security.

The current economic situation has seen everyone hurting in one way or another.  This great recession  has witnessed large scale unemployment in the USA, a record number of property foreclosures and the highest number of property vacation rates.  It is these challenges that are being imposed upon the real estate market as people stop to reconsider their options.

Impact of the Trickle Down Effect

Many of the most severely impacted are the ‘baby boomers’ who are approaching their retirement years.  The loss of jobs and pensions has witnessed many of this group taking some devastating financial losses at the time when they will need it the most.  They have to rebuild and try to recover from these losses, much of which involves continuation in the employment market.  The trickle-down effect means that this impacts the next generation who will not have the space to move into new housing and employment situations.  They simply will not be able to generate the incomes in order to afford the housing.

The new ‘baby bust’ generation will face the severest impact of the economic recession as they should now be heading towards their prime income years. As such they now face the stark reality that there simply are not enough jobs to meet the demand for high paying roles. Ironically it is the overbuilding of houses and the high rates of property foreclosures that has created a glut of properties for which the younger people have no interest in purchasing. Hence you reach a situation where the Baby boomers can’t sell their property and the baby bust generation cannot afford to buy.

This is further compounded by the fact that many baby boomers do not want to sell their properties as they fear moving into retirement homes. Equally many are still unable to pay off their mortgages and as such need  the property market to improve in order to generate the equities that will facilitate a move.  The baby boomer generation are also much healthier than previous generations and advances in medicine mean that they are now living longer and healthier lives. This means that they can afford to delay in the promise of a better tomorrow. This will represent considerable challenges for the Real estate markets in the years ahead, particularly as the baby boomers move into more rural locations in order to enjoy their retirement.

It has become apparent to realtors and construction people alike that there is an urgent gap to fill i.e. the need to build more affordable housing for the younger people.  As such this is likely to see an explosion in the building of condominiums and more affordable housing like duplexes and Town Houses.  Younger people may also be forced into outer urban or suburban areas of Cities and as such forced into a commuter lifestyle.  This is likely to increase the concept of Telecommute work i.e. working from a home office to avoid long wasteful commute times. (Forum).

Geographical Income Distribution

There has been a widening disparity amongst the social class structure in the USA.  The middle incomes of the non –rich in the USA have held a steady increase whereas the wealthier have seen a dramatic rise in income.  This has created a decline in average savings  and this has created trickle down consumption. Despite the income growths at the top level research indicates more personal bankruptcy filings which illustrates the financial duress of  small –medium business.  (Morse).

There is also the question of whether home ownership is slipping out of the reach of younger people and the fulfilment of the American dream is no longer a viable practical reality for a lot of people. Statistics illustrated that in the quarter ending 30^th June  2012 some 74% of the new and existing homes were only affordable to those earning  the median income of $ 65,000 per annum.  This is a steep decline from the previous quarters statistics.  This was due to rising prices with  increases in 92% of the number of houses surveyed, being in stark contrast to a lack of increase in salaries owing to the recession and current economic difficulties.  This particular survey identified Youngstown Ohio as one of the most affordable places for younger people.  Other states that got recognition for reasonable housing included that of Indiana and Nevada.  (Hobbs).

Some realtors see a decline in affordability of housing as being a positive indicator for market recovery. Ultimately it is a question of regaining confidence in the market to stimulate buying and selling activities. It is this increased participation in the market that created the trickle-down effect throughout the economy and as such stimulate recovery in employment, improved levels of income and personal growth.  With the current levels of economic and financial uncertainty, together with the coming presidential election campaign, it is unlikely to see any real improvement until early 2013.

Us Housing Market Recovery

In many regards there is a sense of optimism concerning the US housing market and its ability to make a recovery.  Investors are hinting that it is time once again to start considering investing in property.  There are a number of significant pointers that give rise to this degree of optimism:-

• Housing prices are on the increase again and we have shown steady increases over the last three months;
• Building permits are on the rise again and latest figures illustrate permits to build 769,000 units being the highest since September 2008;
• Lennox the nation’s second largest homebuilder is showing 33% increase in new orders and projecting growth figures into 2013;
• The Federal Housing Finance Agency has reported a small growth of 0.3% increase in property values;
• On May 15^th the NAR reported the housing affordability index as reaching a new high.

This provides some positive indicators that improvement are on the way.  There is no doubt that America is in need of some urgent economic stimulus and capital investment to help revitalise business and promote increased growth.  Much of this must be an analysis of outward investment  like the wars in Afghanistan and Iraq together with adverse expenditures in the healthcare sector.  Positive revitalization of the domestic work economy will almost certainly provide the stimulus to regain confidence in the real estate and housing markets.  This does contain a number of political ramifications that will be played out in the forthcoming presidential elections.  The Republicans  will promote more of a private sector approach to resolving the issue and look towards providing incentives for the wealthy to stimulate investment programs in the USA.  Capital injection is certainly required.  The Democrats are likely to appeal more to the middle class  and working populace pointing out that the recovery is on the way and the people should stick with the agenda.  They need more time to turn the economic fortunes around  and this will require another 4 more years.  The President has a charismatic appeal to a large number of the American people and statistics do show that the party is moving in the right direction.

Conclusions

In general terms America is starting to see the benefit of the trickle-down effect into the commercial real estate market.  This has been a difficult time for America.  It has strived hard towards making the necessary remedial steps to fuel the recovery but this has been hampered by world financial crisis in Europe and the potential ‘melt down’ of the Euro Zone and Euro currency that has had a knock-on effect to the  US dollar and economic recovery plans.  Other issues like the Tsunami in Japan and the redirection of Japanese investment to deal with the domestic crisis in that country ; all of these factors have hampered growth and recovery plans in the USA.  Other countries like China not abiding with World Trade Organization rulings have impacted the recovery of the automobile industry.  Despite this Companies like Ford Motor Company are a shining example of what good products, leadership excellence and smart innovation can achieve within a recessionary environment.  America has demonstrated courage in the face of adversity before and there is every reason to be optimistic moving forward.

Works Cited

Chase, Carolyn. Trickle Down Housing. 2012. http://www.sdearthtimes.com.cut_to_chase/etc_41.html. 17 11 2012.

Forum. The trickle doen effect. 2012. http://www.everythingre.com/effect-of-recession-on-housing-market.html. 17 9 2012.

Hobbs, Michael. Will Home Affordability Slip Out Of American’s Reach? . 2012. http://activerain.com/blogsview/3412016/will-home-affordability-slip-out-of-american. 17 9 2012.

Morse, M. Bertrand A. Trickle down consumption. Academic Research. Chicago: Chicago Booth School of Business, 2012.