Most recessions, including the Great Recession of 2008-09, are primarily the result of excess inventory. Once too much product builds up and overwhelms demand, production comes to a halt. Workers are laid off. Demand drops further. Prices start to fall. And you are in a vicious cycle of recession.
Most recessions conclude when the excess inventory in an economy has been absorbed. At that point, supply and demand are more-less in line. But employment will not pick up in earnest until supply is over-absorbed, meaning there is more demand for product than supply. When that happens, prices will start to rise, new producers will enter a market, new employees will be hired, unemployment will fall, demand will grow and the growth phase of an economy will take off.
Since residential housing is such a large part of the American economy, and since, during the Great Bubble of 2002-07, so much more housing was built (due to speculation and terribly loose credit) than needed, excess real estate inventory was at the heart of the Great Recession. The downturn was so severe and has been so hard to emerge from because that sector is so central to our national economy.
A story today in the Sacramento Bee suggests that our region will now begin a growth phase, as home prices are on the rise. Higher prices will spur development and that will cause unemployment to fall.
Sacramento-area home values will rise by nearly 12 percent this year, after a similar increase in 2012, online real estate tracker Zillow predicted today. The forecasted rate of increase, driven by short supply and buyer demand, far outstrips Zillow's predicted national price hike of 3.3 percent over the next year.
The group which deserves credit for absorbing all the excess inventory which had built up in the Sacramento region are cash buyers. These investors sensed at some point the market for houses had bottomed out. They then began buying them up. And as prices increase in the following years, those cash investors will reap the rewards of the risks they took.
The Sacramento region's predicted gains in 2013 mirror those of nearly 12 percent in 2012, when investors snapped up foreclosures and first-time buyers and move-up buyers competed to take advantage of rock-bottom prices and historically low interest rates of about 3.5 percent for 30-year mortgages.
The second half of the story is that after years of adding foreclosed properties to the housing stock, fewer homeowners are going bust.
Meanwhile, foreclosures continued falling. Bank-owned houses made up 17 percent of all home sales in December 2012 in the Sacramento region, compared with about 19 percent in December 2011. Nationally, foreclosure resales made up 12.4 percent of all sales, Zillow said.
Link: http://www.zillow.com/sacramento-ca/
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