Home Prices: Critical to Small Business

The economy is barely crawling along. A recent downward revision in the country’s gross domestic product shows that current economic activity is still below the recent past cyclical peak, achieved in late 2007, even though the country added more than 10 million people in the workforce age range.

Without economic growth, the large budget deficit and debt problems will continue to worsen. ­After all, so much of the federal government’s revenue comes from people working and paying taxes. The current unemployment rate of 9 percent is just too high.

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One major reason for the economic struggles is that small businesses cannot find funds. Because of their small company size, these entrepreneurs cannot issue bonds like IBM or Disney, so their only option other than tapping whatever capital they have is to secure lines of credit. But we know what the small business lending market has been like; banks have been extra tough on any borrowers without an established name. Any small business that has a concept that it wants to test must rely on its savings, or the owner must tap his or her personal housing equity.

But we also know what’s been happening to people’s housing equity: It has greatly shrunk in the painful aftermath of the housing market crash. The aggregate home owners’ real estate equity stands at $6.1 trillion today versus $13 trillion in 2006. That translates into $82,000 in equity per home owner today. (Federal Reserve data show $190,000 in net worth for a typical home owner, which includes ­assets in addition to housing, versus $4,000 for a typical renter.)

The good news is that the declines appear largely over. However, if we’re going to kick-start the economy, our small businesses will need to find funds to turn their ideas into business growth. That means home price recovery is more critical than ever.