The cost of homes in the areas where prices have already dropped by 50% or more will continue to fall. These regions typically have the highest unemployment rates, local governments are hard pressed to offer basic services, and potential buyers are aware that home prices could drop further. Real estate values in these areas could drop another 20%. In the rest of the country, protracted unemployment and the unwillingness of banks to lend would make otherwise attractive all-time low mortgage rates unappealing.
Unemployment would move back above 10% quickly. In the 1982 recession, the jobless rate was over 10% for ten consecutive months and reached 10.8% for two months. During this period, the manufacturing base had not been destroyed. The economy is now arguably worse than it was in 1982. Many Americans who worked in manufacturing before the recession cannot be retrained, and the factories where they worked will not be reopened. Many companies have recently adopted a policy of keeping as much of their workforce temporary for as long as possible. This keeps the cost of benefits low and allows firms to fire people quickly and without severance. A hiring freeze by American businesses would contribute to keeping 200,000 to 300,000 people out of work per month. Unemployment remained flat from July 2011 to August 2011. At the peak of the recession that just ended, there were nearly six job seekers for every open job, according to the Labor Department. The job market could return to that point.
3. Consumer Spending
One of the primary reasons that consumer buying activity did not grind to a halt at the beginning of the last recession was that many people still had access to home equity loans taken out at the peak of the real estate market in 2005 and 2006. The New York Times recently reported that “lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows.” The situation has not improved in 2011. By the first quarter of the year, falling home prices had reduced the equity Americans had in their homes to nearly the lowest percentage since World War II, according to the Federal Reserve. Retail activity was helped somewhat by the capital available on these lines of credit in 2007, so store closings were probably deferred to the latter part of 2008, but then accelerated in 2010. With more than 11 million mortgages underwater, 24% of the national total, and several million more almost there, the consumer will have no cushion as the economy deteriorates over the next six months.
4. Consumer Confidence
Consumer confidence, the critical gauge of the activity that represents two-thirds of US GDP, will plummet again. The Conference Board’s Consumer Confidence Index would certainly move back toward the all-time low it hit in February 2009 when it reached 25. Currently, the measure is 44.5.
5. Auto Industry
Auto sales, one of the primary barometers of consumer economic activity and manufacturing output, would probably drop back to recession levels. People concerned about employment will defer car purchases. Annual car sales in the US were over 16 million in 2005 but dropped to just above 10 million in 2009. The car companies hope that domestic sales will rise to 13 million this year. In a double-dip recession, at least one million of those annual sales would be lost.