24/7 Wall St.

The enemies of economic recovery among the developed nations are high national debt, high unemployment, and a drop in home prices. The three are linked. It is hard get good prices for properties when many people are out of work. The austerity packages passed by nations such are Ireland to bring down deficits may actually reduce consumers and business spending because these programs often contain tax increases.

The price of Ireland’s homes dropped again in 2010. Draft.ie reports that “2010 marks the fourth year in a row where asking prices fell. Asking prices were 15% lower on average in 2010 than in 2009 and are now 40% below peak levels.”

The drop in Ireland last year is mirrored in the US market where many cities have experience even larger fall-offs in home prices since 2006.

Ireland cannot recover economically if home prices do not improve. Such a blanket statement may seen rash, but the test of the comment is based on the history of nations including the US, Spain and Ireland since the start of the recession. People lose some or all the equity in their homes. That causes their ability to borrow money to drop, often to zero. These mortgage holders can, often, no longer be consumers.

The precipitous fall in home prices has also left large number of homes “underwater” in Ireland. It is not as many as in the US where the figure is estimated at 11 million.  Holders of underwater mortgages are more likely to default.  People simply despair about their financial futures and hand their keys to the bank as the press is fond of writing. On the other hand, many homeowners lose jobs. They cannot pay their mortgages, particularly if they cannot borrow against home equity.

The ripple effect of falling home prices continues to push against bank earnings as they hold more and more bad mortgages. Bank losses often beg some sort of government intervention as the last three years have shown.

Ireland may not be a large country, but its economic problems are not unlike those of the US. The drop in home prices sits at the beginning of a line of large dominos.

Douglas A. McIntyre