While news of substantial third-quarter GDP growth and a slowing of new unemployment filings is a good sign for the overall economic recovery, there are still areas that remain decimated by the financial collapse. No sector continues to struggle as much as residential real estate, with new home construction reaching a six month low in October. This is somewhat surprising news, after the housing market showed some signs of life in the third-quarter and actually contributed to economic growth for the first time since 2005. The decline in new home construction is just one facet of an overall decrease in housing starts of 10.6 since September.

The government has already given substantial aid to the real estate market, extending the program to provide tax credits for first-time home buyers that was due to expire this month, as well as a smaller credit for repeat buyers. While these stimuli efforts have created a mild boon in the housing market this year, experts fear that it is analogous to slapping a Band-Aid on a bullet wound. 

“Most of it [the tax credit] is simply shifting sales from one period to another,” said Patrick Newport, an economist for Global Insight. “It doesn’t get rid of the fundamental problem; there’s still a glut of houses.”

As with “cash for clunkers,” the housing tax credits are most likely only bringing future home purchases into the present. This will likely make new home sales slide even further in 2010, when the tax credits expire. The drop in home sales certainly isn’t due to lack of availability; mortgage rates for 15 and 30-year mortgages are well below 5% and continue to drop, while there is an abundance of vacant real estate.

Current homeowners are still feeling the effects of the recession—even those with good credit. For the ninth straight quarter the number of homeowners with a mortgage that was behind on payments or in foreclosure hit a record-high. Nearly a third of new foreclosures in the third-quarter were from people with otherwise good credit, only extrapolating concern over the housing market. This trend of foreclosures will only push home prices down further, according to the Mortgage Bankers Association.

One of the causes for this rash of foreclosures is the reality that people are still losing their jobs, and there is a reciprocal relationship between the housing market and the job market; when people don’t have jobs they can’t buy new homes, and when people aren’t buying new homes it eliminates many jobs. According to Michael Pento, the chief economist for Delta Global Advisors, nearly 40 percent of all the jobs that were created early in the decade directly stemmed from real estate: mortgage brokers, attorneys, agents, construction workers. As the real estate market has eroded, so has the demand for these workers. With the jobless rate already over 10-percent and expected to continue to rise the next few months, it is evident that something needs to be done to break the cycle.

In an effort to stimulate real estate-related jobs, the government is now considering a new “cash for clunkers” style incentive program to bring aid to the beleaguered housing market. The stimulus would provide households with money to fund weatherization projects, an idea that is being touted as “cash for caulkers”. Two of the professions that have been hit hardest by the recession are contracting and construction, both of which would be aided by an increase in home weatherization projects. These improvements would run the gamut from basic caulking of air leaks to advanced project like installing new insulation or a tank-less water heater.

Two of the biggest proponents of this stimulus are John Doerr, a venture capitalist, and former President Bill Clinton, each of whom have devised their own specifications for the plan. Under Doeer’s proposed $23 billion program, the government would pay for as much as 50-percent of a household’s weatherization improvements—an estimated $2,000 to $4,000—and only houses and apartments would be eligible. Clinton’s plan is broader and would reallocate funds from the clean energy portion of the current stimulus bill; it would also include commercial real estate and industrial buildings.

While the program is obviously more complex and involved than the popular cash for clunkers program, it does more than simply move future sales into the present. Many homeowners know the benefits of weatherization, but are reluctant to make an investment; this program could be the incentive they need to take action. Weatherization not only improves the value of a home, but it also will but down on energy costs and make houses more efficient. All of these facts are nice, but the greatest benefit to the economy will be the number of people who will be employed to perform the projects.

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