Academic

WHY THEY?D RATHER TALK ABOUT SARAH PALIN (CONT?D): How a housing slump will slow the jobs train. ?

By Glenn Reynolds

WHY THEY’D RATHER TALK ABOUT SARAH PALIN (CONT’D): How a housing slump will slow the jobs train.

It seems impolite to ask, what with employment growth sucking wind already. Companies added just around 100,000 jobs a month over the past year, a rate Fed chief Ben Bernanke dismissed Friday as “insufficient to materially reduce the unemployment rate.”

Not a pretty picture.

But it gets worse. Economists at Bank of America Merrill Lynch say one key to a jobs recovery is an improvement in housing — because so much job creation is driven by new businesses that have in recent years been financed in part by home equity borrowing.

This sort of job creation has been missing the last couple years, thanks to the housing crash. If U.S. house prices embark as expected on a new decline, the long-awaited hiring renaissance could be put on hold yet again.

“There has been an adverse feedback loop where low home prices lead to tight credit, hurting jobs and prolonging the housing recession,” writes economist Michelle Meyer.

Much of the concern about another housing downturn revolves around the banks. A sharp house-price decline could lead to more foreclosures, hammering profits and reducing lending, such as it is.

But Meyer points to another effect that could be equally powerful for the jobs market. She notes that falling house prices hit home equity, preventing small business owners from tapping a key source of financing.

It’s a reverse “wealth effect.” Hope and change!

Full post as published by Instapundit.com on January 13, 2011 (boomark / email).