Today was not a great day for news on the economy and its impact on the housing recovery.
The Commerce Department downgraded the economic growth rate to an anemic 1.6 percent, down from an initial estimate of 2.4 percent last month, confirming the economy has lost significant momentum in recent months. This is a sign that doesn’t bode well for employment and raises fears that the nation’s jobless rate could climb higher.
I maintain that housing will not lead the way out of this crisis. Putting people back to work is critical to the recovery. Higher unemployment rates will lead to a greater number of defaults and foreclosures adding to the downward spiral in housing values and upward spiral in available inventory.
2011 is also the year where the largest number of Adjustable Rate Mortgages (ARM) will adjust. Now, the good news is that interest rates are low so the adjustments may not have a huge impact. The downside is many of these homeowners cannot refinance given the changes in lending guidelines and declining property values.
Why is this a factor? Most ARMs adjust annually after the initial period so the bubble will slide into 2012 and later years. Many people would like to have the bubble behind us but until we can refinance some of these homeowners or the banks do something to stabilze their portfolios, the bubble will be with us. Eventually interest rates will climb and those ARMs may start defaulting.
We have to get people back to work if we want to stabilize the economy and our housing market.
