Historically real estate has played an important role in the U.S. economy. One reason for the economy’s sluggish recovery has been problems in the mortgage finance sector that have constrained a traditional housing-led expansion. While real estate’s share of the national GDP figure has been muted for several years, a number of state economies are still heavily dependent.
Hawaii’s economy is by far the most dependent on housing related industries for its state product. Rental and leasing along with other real estate services and construction contributed 22.8% of Hawaii’s gross state product in 2011 (2012 data has not been released yet). This figure does not include expenditures on furniture and related manufactured goods that often accompany a home purchase. Many of the sand states, including Florida, Arizona, California and Nevada, were also among the top ten most housing-dependent economies. However, Florida and Nevada experienced sharp declines from 2006 to 2011. The decline in home sales and prices over this time period combined to reduce incomes derived from real estate and construction came to a halt, but increased rental activity provided some countervailing support. Nascent sales and construction growth in 2012 will help to expand real estate’s share in these economies. This is notable given these states’ recent housing troubles and subsequent high unemployment rates. Housing recovery in these areas should have a strong impact on local employment as well as state and local finances.
Each home sale results in additional expenditures for remodeling , appliances, services, and furnishings and builders respond by adding new inventory as supplies wane. The income generated by these expenditures results in additional expenditures from employees of these industries. The latter process is known as the 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. Not surprisingly, states with the highest home prices experienced the largest impact from existing home sales in 2011. Hawaii and the District of Columbia received the most significant benefit with a host of cities in the Northeast following suit as well as California.
Housing’s contribution to the economy, while muted in recent years, remains strong. What’s more, housing’s role in the economy will only expand as modest price growth and stronger sales volume boost agent incomes, new construction puts more workers back to work with expanding incomes, and stronger sales and rising prices result in robust follow-on spending. A tight lending environment and sluggish employment growth have stymied the economic expansion, but both will likely ease as the regulatory environment becomes clearer and business confidence expands.
 Expenditures on remodeling were added to this calculation based on the national estimate produced by the Harvard Joint Center using the American Housing Survey, the share of first-time and repeat buyers from NAR’s Survey of Home Buyers and Sellers, and NAR’s median home price by state.
Possible federal budget sequestration, continued government deficits, spending cuts, uncertain taxes, and federal policies—they’re all in the news along with a variety of other uncertainties about the economic outlook. The Economic Policy Uncertainty Index shows that uncertainties about future government policies are at historic highs.
What Does this Mean To REALTORS®
The deluge of negative and uncertain economic information in the news can be overwhelming: innumerable blogs, articles, and experts proclaim forthcoming problems. This never-ending cacophony of concerns can be confusing to potential home buyers. It may be helpful to note that the primary benefit of homeownership is the lifestyle it provides. The primary benefits of homeownership are well known—increased educational, cultural, and community opportunities available to families and individuals. The secondary benefit of home ownership is the slow accumulation of wealth as the property appreciates; however, this is a benefit over an extended period of time and is relatively independent of month-to-month fluctuations in the economy. In fact, the economy generally muddles through its problems, and NAR’s economic forecasts—which have been reasonably on target in recent years—show that that the housing markets are in a slow but continued recovery from the Great Recession—circumstances supporting a prudent, conservative buyer’s decision to purchase a home.
There is a deluge of negative commentary and uncertainty—but the advantages of homeownership are well defined on NAR’s website. This information can be a resource in addressing concerns over allegedly unstable economic times.
The nation’s job market is slowly recovering. Slowly is the proper description when the one year percentage gain to October has been only 1.5 percent. However, some small-sized cities are moving at a very fast clip. Here are some examples of top flyers with at least four percent growth from one year ago. For some like Elkhart-Goshen it is only a recovery after a deep downturn and the market is still in a hole. For others like Lafayette, something amazing is going on as the employment has hit an all-time local high. And does anyone know what is going on in Pascagoula, where there are some strange ups and downs?
Each month, the National Association of REALTORS® obtains up-to-date and on-the-ground incisive comments from REALTORS® who participate in the REALTORS® Confidence Index (RCI) survey. The RCI survey tracks expectations about overall market conditions, buyer/seller traffic, price, buyer profiles, and issues affecting real estate, and can be found here.
The selected comments reflect the general sentiment expressed by REALTORS® who participated in the October 2012 survey, conducted from October 22 through November 5, 2012. All real estate is local and conditions in specific markets may vary from the national trend.
REALTORS® reported that the weak job market remains a major concern for buyers, especially given the dependence of credit scores on employment conditions. Policies that are seen to adversely affect the real estate market next year are the fiscal cliff and associated taxes and policies, and potentially regulations from the implementation of Dodd-Frank.
- “Job loss is still causing even the recent HARP homes to now start showing up in short sale and foreclosure market.”
- “Concerned with new Obama tax on sale of real estate. His new 3.5percent tax was slipped in under the guise of the Obama care health bill.”
- “The fear of sequestration is very real in Northern Virginia.”
- “The Dodd-Frank bill is causing chaos with buyers and sellers. Something has got to change!”
Employment growth has improved, consumer confidence reflects growing optimism, and affordability is at record levels driven by sub-4% mortgage rates. The spring market is nearly here and there is much anecdotal evidence that it will be stronger than recent history. One indicator, foot traffic, is the strongest that it has been in several years.