Why real estate has become a drag on the economy – a year in review. – Real Estate Matters
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Why real estate has become a drag on the economy – a year in review.

chartsLast October, Dr. Anthony Downs provided the keynote address at the first annual Minnesota Real Estate Hall of Fame induction ceremony. His address, Why real estate has become a drag on the US economy was a realistic, unvarnished assessment of the issues that our country was facing at the time. He noted that in previous recessions, real estate had often led the way to recovery. Today, however, real estate is a serious drag on our economy’s ability to return to prosperity.

Dr. Downs will return to the University of St. Thomas on October 26 to present the keynote address, “2012 Real Estate Market Update” for the second annual Minnesota Real Estate Hall of Fame induction ceremony. In preparation for this event, I looked back at his presentation from last fall and was surprised by how relevant his address remains today. I thought it would be interesting to revisit his remarks to see how they compare to actual events in the last year. 

Most of the key issues that Dr. Downs mentioned last year are still with us today and many of his predictions have come to pass in the ensuing year. Here are several examples:

Unemployment. Dr. Downs observed “high rates of employment are likely to continue for several more years”. He mentioned consumers will not have the cash to increase spending and small businesses will have little reason to hire more. Related to employment he foresaw “no sudden change in conditions is likely to radically increase the demand for new workers and for new production”. Looking at the national employment rate that has been hovering at just over 9% and the Minnesota rate that has been over 7% since last fall with little prospect of near term improvement, his observations seem to be right on.

Dysfunction in Government. Another issue is that Dr. Downs highlighted is that the American people as a group want to receive many benefits from their governments, but they are not willing to pay the full costs of those benefits. This is a situation none of our political leaders are willing to face directly. He said that we should start telling the truth about the facts ourselves and demand that our political leaders do so as well. During the past 11 months we have seen firsthand the dysfunction in Washington and the inability of our government to confront the problem of our ever growing deficit. He stated that many of our politicians do not want to face the harsh realities of our situation. Throughout the last year, many examples prove these statements these statements to be fairly accurate.

Bank Lending Activity. Dr. Downs noted that many banks have a high fraction of their loans based on real estate. Real estate values have fallen sharply and since 2007. Many of these loans have balances higher than the value of the property. When the property is the collateral for the loan, this leaves many banks in a position where they can’t sell or liquidate these loans. “Underwater loans” have tied up a large portion of the banking system’s capital and it has restricted their ability to lend on new deals. While we have seen some increase in lending activity over the past year, the volume of loans has been nowhere near historically normal lending levels

Real Estate Recovery. In his address he mentioned real estate is not going to recover from its weakened condition for several more years. He went on to say that housing is going to remain a drag on the economy as long as unemployment and foreclosures remain high. Since last fall both unemployment and foreclosure rates have remained at historic highs and the housing market has not begun its recovery leaving many people saying that the market is in the midst of a “double dip”.

In the end Dr. Downs said that “we as Americans must change our ways of thinking of thinking about our own economy and our responsibilities towards it.” He said that we must do this to avoid sinking into a quagmire of debt. Dr. Downs mentioned that we, as a nation, have faced major problems before and that he was hopeful that despite our current problems we will recover and prosper. 

After reviewing his comments from last fall I am very interested in what he will have to say at this about the road ahead for real estate and the economy in general. I hope that you will be able to join us on October 26th to hear what Dr. Downs has to say and to honor five new inductees into the Minnesota Real Estate Hall of Fame.  To register online please visit: http://www.stthomas.edu/business/centers/shenehon/hallofFame/events/20111026_hallofFame.html

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