Small business affects housing affects small business affects...

Small business affects housing affects small business affects...

A couple years ago, I wrote that there were a lot of homeowners whose home equity had been converted to toys and vacations, and that was correct.  On further review I feel that I unfairly omitted the fact that many small business owners financed their startups with their home's accumulated equity.  Entrepreneurs seldom are able to walk into a bank with an idea and get the financing they need without collateral.

This morning on CNBC's Squawk Box, a few of the guests were discussing the slow recovery.  The lack of financing available for small business startups was tied to the lack of accumulated home equity.  Here we are with the economic downturn running its course, but there are parts missing that are making full recovery difficult. 

The effect of the housing depression on small business is hard to ignore.  There are fewer startups now than in a decade, and this is due partly to lower home values and the resulting inability for many to use personal assets to finance new businesses.  In the foreseeable future, it does not appear that home equity will be a common source of funding business startups. This suggests that fewer businesses will be formed, but they may be less leveraged, with more funding coming from accumulated savings and less from loans.  It will be interesting to see if lack of leverage will affect the survival rate of startups.  Ones own money has a higher intrinsic value, and that could affect the quality and care that goes into operating the business and the decision making in its course. 

The long term effect on the housing industry remains to be experienced.  It would stand to reason that, without the rapid appreciation characteristic of the past, one incentive to move up to a higher valued home will probably not return for a long time.  With little other than debt paydown to increase equity, refinancing will seldom happen for anything but improved interest rates.  It appears that lower unemployment and inventory reduction in themselves may not get the industry anywhere near the level of robustness that many of us are hoping to see again.