The real estate industry has a significant role in the U.S. economy. Historically, real estate and related industries accounted for roughly 18% of GDP. While the economy slumped following the decline of the housing market, record low mortgage rates in 2012 and 2013 touched off a resurgence of home sales growth. As a result, prices have improved, boosting buyer confidence and spending on housing and related goods and services.
At the state level, Hawaii’s economy is by far the most dependent on housing related industries for its state product. In 2012, rental and leasing along with other real estate services and construction contributed 23.1% of Hawaii’s gross state product (data for 2013 has not been released yet). This figure does not include expenditures on furniture and related manufactured goods that often accompany a home purchase. Several of the sand states, including Florida, Arizona, and California, hardest hit by the housing slump and recession were among the top ten most housing-dependent economies. Steady sales and modest price growth held roughly stable the contribution of real estate to these state economies in 2012, but this data does not reflect the strong price growth witnessed in 2013. The 2013 housing recovery in these areas should have a strong impact on local employment as well as state and local finances. Price growth in Maryland, New Jersey and Connecticut has been more muted in 2013 due in part to the local judicial processes which constrained market clearing.
How is housing’s contribution measured? Each home sale results in additional expenditures for remodeling, appliances, services, and furnishings. In addition, as the supply of homes for sales declines, home builders respond by adding new inventory. The employees of building companies and material suppliers in turn spend their incomes thereby expanding the economy, a process referred to as an economic multiplier. Furthermore, rising home values have a strong wealth effect where consumers will spend more of their income if they feel confident that rising home prices are expanding their personal wealth. Strong price growth in the District of Columbia boosted the contribution of real estate to the local economy by nearly $19,000 per sale in 2012.
Housing plays an important role in the economy, which was blunted following the recent housing market decline. Low mortgage rates in 2012 and 2013 boosted buyer confidence and sales which in turn helped to expand the economic impact of housing at the state level. In the years ahead, record low inventories will require new construction to satisfy consumer demand. Access to credit has been limited for some smaller builders, a trend that shows signs of improvement. On the consumer front, access to credit remains tight, but employment and incomes have grown modestly, a pattern that bodes well for home sales and housing related expenditures in the future.
[To view the latest State-by-State Economic Impact of Real Estate Activity report, visit: http://www.realtor.org/reports/state-by-state-economic-impact-of-real-estate-activity]