When house prices get pushed up beyond their fundamentals it doesn’t take an economic downturn to cause prices to drop, they can drop simply due to exhausted demand and a smaller pool of buyers due to lack of affordability. Unfortunately this in itself can lead to an economic downturn as the ripple effect takes over and less money changes hands leading to leaner times to all types of connected and seemingly not-so-connected businesses.
There’s a scary article on MSNBC right now about how this seems to be playing out in the US, where home prices peaked two years ago and have been soft or falling since.
The Sun Belt city of Fort Myers saw real estate and construction grow to dominate its economy, accounting in recent years for nearly one out of every four jobs. That meant the housing downturn hit swiftly here, making it a kind of early and extreme indicator of what might happen to the U.S. economy as a whole.
The effect could be less dramatic in places like Washington, where government contracting and other industries may provide a cushion. What the Federal Reserve is trying to determine, as it decides Tuesday how much to cut a key interest rate, is to what degree the rest of the U.S. economy will behave like that of Fort Myers.
How much of our local economy is based on temporary boom-time employment due to construction and infrastructure projects that will be completed in the next couple of years? What happens when those jobs disappear, will there be others to fill their place and will they pay as well?
