Real Estate Prices and Unemployment
Real Estate Prices have always had a strong correlation with the US unemployment rate. Over time, when the United States is at full employment (5% or less unemployment), real estate prices have performed better relative to periods of higher unemployment rates. This correlation between real estate prices and US unemployment has everything to do with demand for housing.
June Unemployment Rate: 9.2%
The most recent June unemployment report showed an extremely small gain of 18,000 jobs added in the United States. This was way below expectations, and the US unemployment rate rose to 9.2%. After combing through the entire unemployment report, there is no better word to describe the June 2011 unemployment report other than “abyssmal”. If the US unemployment rate continues to disappoint, the recover in real estate prices will be prolonged even further.
Why Unemployment Affects Real Estate Prices
The unemployment rate affects real estate prices mainly on the demand side of real estate economics. Most homebuyers must obtain a mortgage in order to fund the purchase of a house. In order to obtain a loan, lenders require that thes homebuyers meet specific income to debt ratios, maintain stable employment, etc. With such a large percentage of the US population unemployed, this eliminates many potential buyers from the real estate market. Also, when people are unemployed, the last thing that they tend to be worried about is purchasing a new home or making a large investment in real estate.
In economics, when supply exceeds demand, prices will decline. And vice-versa, when demand exceeds supply (think of the real estate boom), prices increase. Given the high US unemployment rate of 9.2% and the large amount of Shadow Inventory expected to flow through the pipeline, the future of US Real Estate Prices does not look bright.
Real Estate Prices and Unemployment: Conclusion
The first step on the road to recovery for US Real Estate Prices must be an improvement in the US job market. Without the creation of jobs, real estate demand will continue to be a problem. Although the US government has spent a considerable amount of money trying to help the job market improve, it has apparently been in vain.
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