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Mortgage Layoffs and the Vicious Cycle

This past week we read of massive layoffs by Banks in their mortgage divisions. Between Bank of America, Wells Fargo, and Citigroup about 8400 jobs were shed- with more to follow in the fourth quarter.

The first cause of these layoffs is rising interest rates, which lead to lower refinance rates. The second is an improvement in the banks' distressed portfolio. Less people are required to service and resolve these types of loans, so Banks opened offices in many cities and hired up to meet these dual requirements.

Now the cuts have hit cities like Danville, Il, Des Moines, Iowa, Charlotte, N.C., South Jordan, Utah and Sunrise, Fl. What mortgage banks need are more jobs- specifically table jobs- which in turn will bring homebuyer loans. Unfortunately, we are in the midst of an anemic recovery being further impeded by political gridlock.

The greater the number of layoffs, the more uncertainty among the gainfully employed and the lower the probability of commitments to home buying- it's a vicious cycle.

For investors looking at real estate it means that house prices will not be going to the moon anytime soon in many metros. There is still a good opportunity to buy, but investors need to be wary and avoid cities that are overly dependent on industries that are likely to see softness in the near term. Low employment also impacts qualified tenants - the engine of cash flow for investment real estate.