PERSON OF THE WEEK: You may recall the old brainteaser about whether the chicken or the egg came first. In today's economy, the chicken and the egg have been replaced by the housing market and the job market – and the challenge is to wonder which one's recovery needs to come first.
This week, MortgageOrb explores the impact of 9%-range unemployment on the housing market with Richard Booth, a certified mortgage banker with America's First Funding Group LLC, a residential & commercial lender in Neptune, N.J.
Q: Which is harming which: Is the housing market contributing to large unemployment numbers or are the unemployment numbers dragging down the housing market?
Booth: Unemployment is the major drag on the housing market. Unemployed individuals cannot get a mortgage to buy a home or refinance into a lower mortgage rate to improve their financial situation. Those who do not have job stability are reluctant to take on the commitment of homeownership.Â Â
Furthermore, if a home is lost to foreclosure, it has a negative impact on home values in the neighborhood. Reducing home values affects homeowners seeking to sell and trade-up, and hampers those seeking to sell and relocate to a better economic climate.Â
Generations X and Y, who are in their prime home buying years, are among the hardest hit by unemployment and saddled with record college debt. Homeownership needs the ‘new blood’ in the system.
Employment is the basic component of homeownership – interest rates and home prices are secondary. I agree with the recent statement by the National Association of Realtors: ‘For every two homes sold, a job is created.’ However, without a job, it is difficult to buy a home. Homeownership is the fruit of employment.Â
Q: What impact is the economy having on employment stability and employment opportunities in the real estate finance industry?
Booth: Employment in the real estate finance industry has shrunk from its peak in 2006 of more than 500,000 to 248,000 in February 2011. Figures compiled by the Bureau of Labor Statistics (BLS) and the Mortgage Bankers Association (MBA) take into account the MBA's combining of the BLS categories ‘real estate credit’ and ‘mortgage and non-mortgage loan brokers.’Â
That means a sobering 50% reduction since the peak. While some of the attrition is due to new licensing standards, the economy has clearly played a major role. In my office, we had 14 loan officers, two full-time underwriters and an office cleaner. We are down to five loan officers and now use a contract underwriter. The office cleaning is shared by everyone.Â Â
For me, it is a war of attrition, and in the end, I will be stronger having lived through this crisis.
Q: Some people have advocated rewriting tax code as a means of spurring job creation. What's wrong with the tax code, and how would you recommend fixing it?
Booth: We need to revamp the tax code for individuals and businesses. Our current code is punishing those who produce with higher tax rates. I am not a millionaire or billionaire, but increasing taxes on well-to-do people is never going to make me any wealthier. It will encourage the wealthy to find shelters and reduce their taxable income.Â
Today, over 40% of the population pays no federal income tax. I feel that everyone, regardless of income, needs to pay some federal income tax. A recent client of mine living in New York City is paying almost 48% of his income in federal, state and city taxes. I do not think that is fair.Â
In short, we need to broaden the tax base to include everyone and not single out a specific bracket for higher taxes. I am in favor of a flat tax, and I would gladly give up my deductions for a simpler and lower overall rate.
For businesses, we need to reduce their burden to encourage them to invest and return the profits made offshore to the U.S. Instead of another stimulus, removing the capital gains tax and cutting the corporate tax rates would spur economic growth.Â
Q: There have been a number of attempts out of Washington to fix the economy. Why did they fail?
Booth: The government over-promised and under-delivered. The stimulus package was hailed as the answer to keep unemployment under 8%. And projects like the so-called Cash For Clunkers and the home-buyer tax credit did not produce any long-term growth. What was produced was a great deal of new debt.Â
National healthcare continues to haunt businesses, especially small-business owners who are still trying to figure out the new regulations. Until this happens, they are going to be reluctant to hire new employees. This is what I hear almost daily from my small-business clients.Â
The last failure was the bailouts, which started under the Bush administration and expanded with President Obama. The chosen banks and car manufacturers basically became wards of the state, and the bailout mentality angered other business owners who had to survive on their own.
True capitalism must allow failures to fail. In the end, President Obama's economic team did not understand that real economic growth comes from the private sector.Â This growth occurs when private businesses have the confidence to invest in their businesses with the expectation that they will receive a return on that investment. The programs set forth by the president's economic team did not instill any confidence, and business is sitting on the sidelines. What I find amazing is that many have returned to academia and are now teaching business!