Today’s article from Time Magazine highlights an ongoing issue regarding housing and the economy. Undoubtable the housing market crash was one of the primary catalysts for the economic downturn. But housing also creates jobs and can fuel economic recoveries. New construction has a trickle down effect..from construction workers, realtors/brokers, morgtgage lenders, title companies, engineering firms, to the manufacturing sector that provides raw materials such as lumber, carpet, etc. to household goods such as appliances. The lack of housing can also be a deterrant for some communities as they look to attract economic development and new employers. If a community does not have adequate housing stock for the workforce..chances are the company won’t relocate in that community.
Can Housing Power the Economic Recovery?
Why is this? There are several reasons. First of all, since a new home is usually the biggest purchase any of us will make, we tend not to do it during recessions. Recessions cause housing demand to become pent up and then released once a recovery begins. Secondly, investment in a new home usually necessitates many other big ticket purchases like furnishing and appliances. Finally, construction is a a great source of relatively high-paying jobs for lower-skilled workers — the sorts of jobs that we’ve been sorely missing since the financial crisis. And just as housing construction creates demands for different consumables, it also has a trickle-down effect on employment, creating the need for real estate brokers, landscapers, and lawyers, just to name a few.
(MORE: Home Price Gains Continue Increasing Nationwide)
But the 2008-2009 recession was different. Housing didn’t come roaring back as it did after the 2001 and 1991 recessions. In fact, the housing sector continued to be a drag on the overall economy until last year. Not that this is surprising given the genesis of the recession was a real estate bubble — one that wiped out trillions in wealth and severely damaged the financial system.
But over the past year, the housing market has begun to recover. On Tuesday the analytics firm Core Logic announced that in February, home prices increased 10.2% year over year — the largest increase since 2006 — marking 12 straight months of year-over-year national home price increases. And the job market is starting to reflect these gains. Earlier this month, the Labor Department announced that the construction sector added 48,000 jobs in February and 151,000 total jobs since September. So we’re making progress, and housing seems to be a big factor.
(MORE: Will Reform of Fannie and Freddie Kill the 30-Year Mortgage?)
But this doesn’t mean we should expect a housing boom any time soon, or that we can rely on construction to bring the economy back to full strength, and here’s why:
1. The latest reports are only positive in comparison: Sure we’ve had almost a year of rising home prices, but that comes after more than three years of nearly uninterrupted home price declines, which reached a magnitude of 18% in some months.
2. Unemployment remains high and wages stagnant: Despite the recent gains in the job market, there are still 3 million fewer jobs in America than before the recession, while the average American’s income has fallen 7.3% since December of 2007. Since home price appreciation is driven by growth in employment and growth in income, we need to see more progress in these areas before we can expect a more robust housing recovery.
3. Americans are forming fewer households: The Census department defines a household as any group of people living together. From 1997 to 2007, Americans formed roughly 1.5 million households per year, but during the recession that rate fell to 500,000, according to Timothy Dunne, vice president of the Cleveland Federal Reserve Bank. While this number has crept up back above 1 million once again, there is still a big question as to what the “new normal” will be going forward.
Will young Americans continue to spend their twenties living with their parents, or will they strike out on their own the instant they have the opportunity, regardless of how difficult it is to make ends meet? Frankly, this question is impossible to answer. What is certain however, is that even if the economy continues to improve, many young people today are starting their careers with large student loan burdens and jobs that don’t pay particularly well. And for the time being, the recovery in the housing market is being driven by investors who are snapping up cheap properties rather than first-time buyers — as the National Association of Realtors has reported that first-time buyers purchased just 30% of buyers last month, as opposed to a more-normal 40%. But investors aren’t going to continue to drive price increases unless they believe there will be demand for rentals coming from — you guessed it — household formation.
This is not to say that the housing market isn’t playing a big role in our recent gains. But lets remember that the latest economic news, whether its GDP growth, job growth, or wage gains, has been only modestly positive. Our economic performance over the past year would be excellent during normal times, but it frankly hasn’t been anywhere near good enough to bring us out of the massive hole the recession caused. The fact that the housing recovery has begun is great news, but we’ll need more than a stable housing market to bring the American economy back to fighting weight.
