Falling Home Prices Continue to Impact Small Business Owners

by Michael Essany

2 min read

Despite what many perceive to be a recovery in the current housing market, more than 28 percent of U.S. homeowners remain underwater on their mortgages. Clearly, the catastrophic financial effects of this reality have negatively impacted millions of homeowners… but the still free-falling housing prices from coast to coast are also taking an unprecedented toll on small businesses.

According to the Cleveland Federal Reserve, approximately 16 percent of all U.S. small business owners have pulled equity from their primary residences to begin, maintain, or jump-start a struggling small business. In the United States, there is an inextricable link between small business ownership and the use of home equity as a line of credit.

The Federal Reserve’s Survey of Consumer Finances indicates that between 1998 and 2007, small business-owning households “took on larger amounts of home equity debt faster than households headed by someone employed by others.”

Effects of the Credit Crunch

In small business, money equals opportunity. And with access to small business capital so heavily dependent on home equity, it’s easy to see the impact of the downward trend in housing prices on the small business community, which continues to stagger from a precipitous loss of more than $16 billion in home equity credit since the housing bubble burst.

“Home value declines are currently equal to those we experienced during the darkest days of the housing recession,” Zillow chief economist Stan Humphries says, noting that home values in the first quarter of this year tumbled another 3 percent from the prior quarter and presently remain 30 percent below the June 2006 peak. “With accelerating declines during the first quarter, it is unreasonable to expect home values to return to stability by the end of 2011.”

Mark E. Schweitzer and Scott Shane of the Federal Reserve Bank of Cleveland concur that a long road remains before small business borrowing will return to pre-recession levels. However, “The link between home prices and small business credit,” Schweitzer and Shane agree, “poses important challenges for policy makers seeking to improve small business owners’ access to credit.”

The Fed members believe the solution is significantly more complicated than urging bankers to simply “lend more” or reducing the regulations that inhibit more liberal lending to small businesses and entrepreneurs.

“Returning small business owners to pre-recession levels of credit access will require an increase in home prices or a weaning of small business owners from the use of home equity as a source of financing. Neither of those alternatives falls into the category of easy and quick solutions,” Schweitzer and Shane conclude.

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