Over the past few years, rising real estate valuations sent exchange traded funds (ETFs) higher and made millions of Americans rich in equity. Then the bubble popped. As we try to work our way back to greener pastures, commercial and residential real estate still pose risks.
Conor Dougherty of The Wall Street Journal reports that the supply glut in the consumer and commercial real estate market – an imbalance that will be worked out over time – could act as a brake on economic growth for several reasons:
- The first is that construction jobs will not recover with the overall economy as long as there is an oversupply of real estate. Since its peak in March 2007, the industry has shed 2.1 million jobs. The remaining 5.6 million jobs now represent 4% of U.S. jobs, down from 6% in 2007. [6 ETF Opportunities in Challenged Markets.]
- The second is that homeowners can no longer take out equity loans to finance lifestyles that could not be supported by normal income. Over the last three quarters of 2009, the ratio of dollars taken out of homes to total income fell. This means consumers can no longer afford to spend as much money as they used to.
- The third is that small businesses are not borrowing as much as they used to. Small businesses typically use the value of their property to secure bank loans. But as the value of their properties has dropped, so has their ability to finance debt. Considering that small businesses are key job generators, this does not bode well for unemployment numbers. [Why Homebuilder ETFs Still Have Appeal.]
- Finally, lower property values translate into lower tax revenue for local governments. Although many states have not felt the pinch of reduced property tax income because taxes are calculated with outdated numbers, they will soon. In California, property taxes in Santa Barbara fell for the first time since 1978.
Many local governments are already deep in the red. Reduced tax revenue will only increase the pressure to reduce government spending despite efforts to boost job creation.
What can you do?
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- SPDR S&P Homebuilders (NYSEArca: XHB)
- iShares Dow Jones U.S. Home Construction (NYSEArca: ITB)
- Vanguard REIT (NYSEArca: VNQ)
- SPDR Dow Jones REIT (NYSEArca: RWR)
- iShares FTSE NAREIT Industrial/Office (NYSEArca: FIO)
Sumin Kim contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.