When considering the risk for every buyer and seller nothing applies more appropriately to today’s economic conditions and real estate market than the term “negative feed-back loop.” What does this term mean? In a nut shell, negative feed-back loop refers to the impact bad news has on trends in the market. When bad news in one area creates even worse conditions in another area, which in turn creates even more bad news than the first area, you have a negative feed-back loop.
Let’s apply this term to the economic recovery. A continued recovery will be driven by a recovery in employment and the housing market. When these numbers improve, consumer and business confidence also improve and a gradual recovery is on the way. With a negative feed-back loop, the opposite occurs. For example, business and corporations begin to hire more people because there is a need for these people. As soon as negative news is released about a variety of issues such as deficit spending in the U.S., massive under-funding of entitlement programs such as:
- Social security
- Medicare, and Medicaid
- Political paralysis resulting from the government’s inability to agree on economic policies,
- Europe’s failure to deal with the euro’s own crisis and a potential debt default by Greece, Ireland, Spain, Italy, and Portugal
- A significant slow-down in economic growth in emerging markets such as China.
When bad news is released on any of the above topics, it causes great concern, which in turn depresses the economy even further. The result is a vicious cycle that could, at worse, lead to a double-dip recession or possibly even a loss decade similar to what occurred in Japan where economic growth is paralyzed for 10 or even 20 years.
Given the political climate that will be in place until a new president takes office in 2013, and the multitude of other critical issues facing the U.S. and world economies, it becomes more and more likely that it will be a long, hard road to recovery.
It may be time for all of us to get used to conditions as they exist now because it could be a long time before they improve.