According to “The Long Recovery of the Southeast: The Federal Reserve Bank of Atlanta 2010 Annual Report:”
…[Economic] progress was hindered by several intertwined forces: tepid employment growth, general economic uncertainty that restrained consumer and business spending, challenging banking conditions, and still-sickly housing markets in the region’s largest states and metropolitan areas.
They surveyed many banks and small businesses on the problem of long-term unemployment. Surprisingly, it is not mismatched skills or a shortage of credit for small businesses. The Federal Reserve Bank of Atlanta cites extended unemployment benefits as one of the problems. We agree, and feel extending unemployment benefits served more as a welfare program than a solution to the unemployment problem. Another cited cause for unemployment was uncertainty over regulatory reform, healthcare reform, general consumer demand and continued availability of credit. However, the report concluded that the main reason unemployment rates had not fallen is “that we were in a very deep hole and it will simply take us a while to crawl back out.” What we find most interesting is the report indicates that our federal government is not doing anything to fix the problem.
The Federal Reserve Bank of Atlanta reported that it was not small businesses borrowing, but real estate, construction and developers. Small businesses were hording cash and were simply not borrowing to expand their business. Small businesses were hiring more temporary and contract workers, resulting in a new production process. Generally, businesses hire temp workers, but eventually have to hire full-time employees to keep up with demand. Nowadays, we find innovative business technology allows businesses to survive and even thrive on part-time or temporary help. There has been a structural change in business, and we are not sure how long it will last. Once there were pools of workers crunching numbers for monthly billing, but now with computers, a week-long project is merely a half a day.
Reading this report, we also wonder how small community banks will survive. Large banks have the ability to borrow at 0%, allowing them to write down homes and apartment complexes. Big banks then slowly put them back on the market. Banks likely will have to clear the underperforming inventory before the housing market turns around. We suspect survival of the community banks will be a combination of service, low rates and being competitive for small businesses. It concerns us that some community banks will have capital issues combined with their inability to borrow at 0%, if they have to continue writing down loans. We feel the community banks with the best chance of survival are the ones that cut their losses early.
For homeowners worried about price appreciation, we feel it will depend on the neighborhood. We believe established neighborhoods will see growth again, but upstarts will continue to struggle for some time. We feel there is much more shadow inventory than banks are leading us to believe. Thus the housing market recovery will take longer than most are predicting. We also feel if the final budget/debt ceiling resolution eliminates mortgage deduction it would be the nail in the coffin for real estate. This decision would absolutely make homeownership an emotional decision rather than an economic decision. Without the mortgage interest tax deduction, it should always be cheaper to rent.
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