The market-oriented economy of the United States of America is the largest and most technologically powerful in the world. With technological predominance over the years, there has been a gradual development towards a ‘two-tier labor market’ wherein those at the bottom do not have the requisite education and/or relevant professional or technical skills as those at the top. Hence, those in the former category remain deprived of a comparable rise in pay rate, health insurance coverage and other such benefits. Since 1975, practically all gains have gone to the top 20% of households.

The Iraq war in 2003 and the rising prices of oil between 2005 and 2008 have drained the national resources extensively. Other issues like inadequate investment in economic infrastructure, rising medical and pensions costs for an aging population , trade and budget deficits, and stagnation of family income for low income groups have further stunted economic growth. Of course, the mortgage crisis, the failure of big financial institutions and credit rating agencies are also being looked into.

Loss of jobs led to defaults on home loan repayments. Thus, unemployment and homelessness have been the two major fallouts of the present financial crisis that have adversely affected the lives of millions of Americans. Unemployment peaked at 10.2 % in October 2009. In May 2010, it was at 9.7 % with 15 million unemployed. The recent improvement in employment is largely due to large scale temporary hiring by the government to conduct the 2010 Census. Private Sector hiring has barely changed.

Factories are producing more but prices are falling. The manufacturing-led recovery is not generating inflation. This should help in further growth. Rebuilding their inventories, meeting increasing overseas demand and investing in new equipments is keeping the manufacturing sector in the driver’s seat in this phase of recovery. Manufacturers employed 29,000 workers in May. Working hours have increased and overtime hours are at their highest in two years. Increase in global demand for agricultural commodities, housing and infrastructure is also helping facilitate the rebound in the manufacturing sector. It is the domestic home-construction sector that remains unimpressive. April saw work begin on 672,000 houses and this was down to 648,000 in May. The deadline for tax credit for first-time home buyers ended in June and this will further cool sales and construction in the latter half of this year.

In the U.S., market analysts are projecting 2010 to end with a 9.7 % unemployment rate with a significant drop to 8 % by 2011.

In the United Kingdom, the number of people claiming Jobseeker’s Allowance (JSA) decreased by 30,900 between April and May 2010 to 1.49 million. It is for the first time that the claimant count has come down below 1.5 million since March 2009. The number of vacancies between March and May, 2010, has increased by 7,000 to 492,000.

Japan recorded a 5.10 % unemployment rate in April 2010 after peaking at 5.6 % in July 2009. Even though layoffs are not happening, employers are still reluctant to hire afresh.

Germany seems to be driving the European economy and is set to expand by 3-4 % this quarter. Positive trends have been forecasted for employment as well as consumer spending and manufacturing, according to Wall Street Journal. Unemployment fell by 45,000 in May,2010, with the unemployment rate down to 7.7 %, lowest since December 2008. There were 3.24 million Germans unemployed in May 2010. Experts do warn against exposure of German banks to debt-ridden Euro countries like Greece, Portugal and Ireland.

Fiscal and financial responsibility is the need of the hour across the board. Ben Bernanke, the central bank chief of USA said, “Minimizing the risk of future financial crisis will require tougher prudential standards for financial firms, especially systemically important financial firms, as well as more intensive supervision”.

The National Federation of Independent Business (NFIB) came out with a Small Business Optimism report as recently as in mid-April. Its chief economist, Bill Dunkelberg, said in an accompanying written statement, “Something isn’t sitting well with small business owners. He attributed it to “poor sales and uncertainty” that “continue to overwhelm any other good news about the economy.”

Everyone agrees with the trend towards recovery, but small business owners are extra cautious and rightly so. The recovery is treading ever so haltingly that even a die-hard optimist must surely be wondering as to when he will experience its impact on his own business. Around 950 business owners were surveyed by NFIB. They acknowledge that job cuts have slowed and a few businesses do plan to hire in the next three months. But sales are still weak, credit is hard to find and, not surprisingly, capital expenditure is abysmally low. The general sentiment is not optimistic for the near future.

Hence, businesses which generate jobs are still leaning towards freelance or part-time help as they would rather cut costs. So, while job cuts are tapering off, fresh hiring is not yet on their minds. Caution is in the air. This wariness has rubbed off on the credit markets too. While large and small community lending entities want to lend more to small businesses, they are wary in identifying qualified borrowers. Thus, business owners are finding it increasingly difficult to meet the even more stringent guidelines for securing loans for their businesses.

True, not many pink slips are being handed out. But there is a huge backlog of those millions of jobs lost. The job market has prompted many to become self-employed. Small business owners need the confidence that extra staff will contribute to their bottom line.

Will Draper, a veterinarian of ten years with an entrepreneurial spirit, opened his first veterinary office in 2001. He soon began to expand, opening several more offices over the short span of just 6 years. In 2007, Draper envisioned a state of-the-art animal hospital with an emergency room involving three times the space. After speaking to many lenders, he opted for Live Oaks for their no-nonsense approach and because he was impressed with their knowledge of vets. He then learnt they were into niche lending to veterinarians only! He got a Small Business Administration-backed loan.
Soon, his business grew 40% and in the process of keeping pace with it, his expenses mounted. He needed to hire more people. He called Live Oaks again. They agreed to help him again before the problem got out of hand. He got the loan with free coaching on how to work the payroll and other expenses. They even guided him on how to avoid his mistakes in future. Said Draper, “They never made me feel bad about approaching them again, but instead made me feel that they really want me to successful.”

The CEO of Live Oaks says this is their competitive advantage in wooing borrowers. Business has doubled for them and they have hired in a period when others were laying off staff! They are a 100% ahead of their projections.

I know such real-life stories are rare and far between in these hard times. Let’s hope to ‘multiplicate’ them, if I may be allowed to coin a new word!

In the year 1994, subprime mortgages amounted to 5% of the total mortgages. By 2005, this figure had shot up to 20%. In 2006, 22% of all subprime loan payments in arrears of 60 days or more occurred in Jackson, Mississippi; while Detroit, Boston and California figured at 24.6%, 15% and 14% respectively.
Previously, it was the commercial banks that offered mortgages at fixed rates only. With changes brought about in the banking system, mortgage finance companies and mortgage brokers were now competing with the traditional banks.

The consumer was offered loan repayment options at low interest rates for a longer period of time with the actual prices of property having shot up. Thus the consumer now had more choices to get his mortgage serviced. Subprime loans took care of defaults on payments resulting in an even longer repayment span.

It was in 2005 that interest rates started to inch up again after a long spell of stability. Consequently, there was a gradual slowdown in demand for new homes. It was then that the prices of houses also started coming down. Mortgage defaulters were increasing. Home owners with subprime mortgages were neither able to deal with increase in payments nor were they able to sell their homes at their previous value. As home values and prices had dwindled rapidly, homeowners had difficulty selling at a price that would cover their mortgages. In California, the houses were overvalued by as much as 77%.

The total mortgage debt outstanding was $12,063,864 million in 2005. This went up to $14,607,840 million in the fourth quarter of 2008. With federal government aid, this figure had edged down to $14,287,340 in the fourth quarter of 2009.

This has resulted in homelessness of Americans on a massive scale. Approximately 170,000 families needed shelter in 2009, up from 159,000 in 2008, according to an annual survey by the Department of Housing and Urban Development. Forty-two percent of the homeless were on the streets in 2008. In 2009, twenty-nine percent of adults were staying with relatives. $1.5 billion of stimulus money has been allotted for the homelessness prevention program. Short and medium-term rental assistance (ranging from 3 to 18 months) will be provided to individuals and families. These funds will also be allocated for utility deposits, utility payments, moving-cost assistance and hotel vouchers.

An estimated 2.5 million foreclosures were completed between 2007 and 2009. Another 5.7 million foreclosures seem unavoidable, given that mortgages have become too expensive. The Home Affordable Modification Program modifies the loans but beyond that, those who do not get support by the Federal Government are expected to default again within 12 months. These customers are increasingly burdened by credit card debt, auto loans and other expenses. Re-default rates are expected to go up from 40% to 60 % on modified mortgages. People are being advised to opt for short sale over foreclosures and thereby avail of the cash incentive. As many as 7 million houses are vacant and not currently for sale. The inventory must be cleared before the industry rebounds. Further complicating matters, the costs of new homes may increase due to restrictions imposed by the Environment Protection Agency, tightening requirements for builders to better handle storm-water runoff. The National Association of Home Builders is soon expected to enact these regulations.

First-time buyers accounted for nearly half of the homes purchased in April, 2010. This is attributed to historically low mortgage rates and lenient lending standards. The head of the Federal Housing Administration, David Stevens, calls this “a market purely on life support” and in addition, lending is expected to tighten. Also, the European debt crisis could compel a hike in prime lending rates of banks. So even if the mortgage rates currently remain low, a number of factors may shape the future of the American housing market. Unemployment trends will also contribute towards how the real estate industry rebounds in the immediate future.

The uncertainty is not going to end in a hurry.