Thursday, November 22, 2012

Housing Market - The Introduction (Part I)

During the Great Recession of 2007-2009, investors (individuals and institutions) were badly burnt by the housing market. Many lost their homes, most lost their investments, and others felt the housing impact indirectly through the stock market crash caused by the mortgage based securities.

As things turned from bad to worse, people left the housing market altogether. Since negative headlines were abound, many investors started to wait eagerly for the next shoe to drop and then buy in. But they waited.. 

And waited..

And waited..

As a result, they did not invest in housing market near the bottom (a classic case of human psychology). And the next shoe never dropped. Although keeping one’s powder while waiting for the mess to clear up was a prudent decision, it resulted in investors missing the housing bottom. At the bottom there was so much pessimism that only the strong-hearted and those with deep pockets ventured in this arena.

Over the last 7+ months, housing prices have been rising steadily. They are rising faster in the heavy hit areas, but nonetheless the overall market seems to be getting better. Individual investors have taken this as an all-clear signal, and are now starting to jump back into the market. But there is more to the housing recovery than what meets the eye.

US Unemployment
U.S. national unemployment rate is 7.9%. We have witnessed unemployment rate above 7.8% for the past 4 years (since Jan 2009). This is the longest period unemployment has stayed this high in US history. This shown from the historical US unemployment chart. Furthermore, this rate does not include all the discouraged workers, or people who are working for less.

Even more troubling is the fact that the unemployment rate for workers between ages 20 and 29 is at: 13.9% (shown below). This age group is the group which governs organic demand for new houses. These are new workers coming out of college and looking to get a job, and then to buy a house. But with such high unemployment rate along with under-employed rate, it is clear that these new workers will not be driving the demand for the housing market. 

This is a very troubling observation because the demand that we are seeing right now cannot be organic. This forces us to analyze where the demand for houses is coming from. This answer will help us better understand current rise in housing prices. 

In Part (II) of Housing Market - The Introduction (Sunday), we will discuss the sources of demand in US housing industry, and what we will discuss about housing market through December

Happy Thanksgiving!!

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