The economy is barely crawling along. A recent sizable downward revision to GDP figures showed that the current economic activity – adding up all income generation from producing autos to providing hair cuts – is still below the recent past cyclical peak achieved in late 2007 even though the country added over 10 million additional people in the workable age of 16-and-over. Progress in America has stopped.
Without economic growth the large budget deficit and debt problems will continue to worsen. History has revealed that one of the biggest sources of federal government revenue has come from more people working and more people paying taxes. The current unemployment rate of 9 percent is just too high.
One major reason for economic struggles is that small businesses – the entrepreneurial heart of America – cannot find funds. Because of the small nature of the business, these entrepreneurs cannot issue bonds like IBM or Disney. Banks also have been extra tough on any borrowers without an established name. Small businesses, therefore, typically have relied on their savings and their housing equity to gather funds to test out new business ideas.
But housing equity – housing asset value minus mortgage liability – has greatly shrunk in the painful aftermath of the housing market crash. The aggregate homeowners’ real estate equity stood at $6.1 trillion today versus $13 trillion in 2006 according to Flow of Funds data from the Federal Reserve. According to Census, there are 74 million homeowners. So on average, the average equity per homeowner in 2011 is $82,000, which is down from $170,000 in 2006. A separate Federal Reserve data from Survey of Consumer Finances showed that the median homeowner net worth to be $190,000. This larger net worth figure is due to homeowners having other assets in addition to housing equity. The median renter’s net worth was $4,000. The only good news at the moment is that the further declines appear largely over. Price measurements from NAR, Case-Shiller, Core Logic, and Federal Housing Finance Agency have all noted a slight uptick in home price in recent months.
In order to truly kick start the U.S. economy on a sustainable robust growth path, small businesses need to tap funds and home price recovery will be critical to that process in the upcoming years. Any obstacle to home price recovery will, therefore, hamper economic growth and job creation. For example, policymakers need to be well aware that a trimming of mortgage interest deduction will hurt home values and consequently hurt small business start ups.