Moving towards a Virtuous Cycle ?

For years we have been stuck in a vicious cycle. Real estate collapsed. This caused the job market to collapse. Lenders tightened their standards because lending on real estate was a risk and investors did not want to purchase home loans on the secondary markets. Job losses led to further housing declines. Vicious cycles are tough to break and this is exactly why our recovery has been so slow. It has been a step-by-step recovery.

In a virtuous cycle, real estate is strong. Builders build more homes. That creates more jobs and thus more demand for real estate. Because home values are strong, lenders want to finance real estate and they adopt aggressive standards.
Of course, the next question is–when can we move into a virtuous cycle?

We have seen some evidence in the past few months that the tide is turning. For one, real estate values are up. This means that real estate and loans secured by real estate are becoming a better investment. Theoretically, this will make lenders more confident in loosening their own standards. Along with this, defaults on newly originated home loans are down significantly. Though the US is still dealing with a shadow inventory of homes that need to be sold, these are mostly older defaults and this inventory is shrinking because newer loans are not being added as quickly.
Finally, builders are again building more homes because of a shortage of inventory. Most prognosticators feel that the slow recovery will continue step-by-step. However, we feel that there will be a tipping point in which all the stars align behind recovery and thus the process will speed up. It will be interesting to see whether the push by central banks all over the world to purchase more securities and thus keep rates down will give us the final push to reach that tipping point. This push will have to overcome the uncertainty which hovers over the elections and budget negotiations in our Country. It should be a very interesting fourth quarter.