What goes down must come up.
At least, that’s how it works in the world of real estate. Throughout the course of modern history, the U.S. housing market has repeatedly turned Newton’s well-established law on its head. Following a crash that was as swift as it was severe, it seems that home, once again, is where the money is. Signs of a housing market recovery bring hope for improvement in the overall economy. And if the past is any indication, optimism—albeit cautious—just might be warranted.
Why? The health of the housing market tends to be a leading indicator for the direction the general economy will take. When real estate is going strong, it sets the stage for a burst of economic growth, but—like sirens before a tornado—a troubled housing market signals a brewing storm. The real estate sector and the economy feed off each other, and it’s a relationship that can range from symbiotic to parasitic.
When the bottom fell out of the housing market in 2006, the U.S. waited with bated breath for the economy to go too. We weren’t disappointed. Now, as the real estate market gains speed, the economy is positioned to do the same—and for the first time in a while, things are looking up.
By Keely Stockett
Real Estate and the Economy: The Best and Worst of Friends
The close tie between the housing market and the economy is intricate, to say the least. Real estate is a major source of wealth for families; many view ownership as a form of investment. When real estate sales fall, real estate prices tend to follow. That means home values decline, regardless of whether homeowners are selling their houses, and the investment that they made takes a hit. Declining home values prevent homeowners from getting the same amount of home equity loans that they previously received, and needless to say, it’s all downhill from there. Consumer confidence decreases, people hold their money a little tighter, and as a result, spending declines and the economy takes the heat.
The health of the housing market also affects the economy by way of the job market. The hefty real estate sector has a powerful hold over unemployment rates. According to the Bureau of Labor Statistics (BLS), the real estate, rental and leasing sector employs almost 2 million people across the nation. But it goes further than that.
“Take into consideration how many people touch the construction of a new home,” says Mark Blazek, president of the Greater Chattanooga Association of Realtors (GCAR). “Carpet manufacturers, framers, furniture makers, plumbers, electricians, roofers, cabinet manufacturers, painters, landscapers, bricklayers—it’s such a large umbrella.”
When homes aren’t being built or sold, a lot of labor is left untapped, which means high unemployment rates, low consumer confidence, decreased spending and ultimately, a sore economy.
Of course, a cycle is only vicious when it’s headed in the wrong direction. In 2012, after years of gloomy reports and bleak forecasts, the housing market began to show signs of a sustainable rebound, and it seems to be taking the economy along for the ride.
The U.S. Housing Market’s Recent Troubles
Just how far did we fall during the Great Recession? Some would say that we hit rock bottom—and then, we started digging.
The housing market began a precarious climb in 2001, when new home sales clocked in at 908,000, according to the U.S. Census Bureau. It marked the start of a five-year boom. In 2005, new home sales surged to an all-time high of approximately 1.28 million. By 2008, that number had plummeted to 485,000. The market screeched to a halt in 2011, and the year ended with just 306,000 new home sales—that’s a 76% drop in six years.
Other market indicators tell the same story. The S&P/Case-Shiller U.S. National Home Price Index, which measures changes in housing prices, decreased by about 33% from the fourth quarter of 2005 to the same quarter in 2011. National housing starts peaked at approximately 2 million in 2005 and fell to 554,000 four years later, a 72% decrease, according to the U.S. Census Bureau. Between 2007 and 2008, roughly 265,000 people lost their jobs in the real estate sector alone. In 2011, when all was said and done, employment in the sector had decreased by 12%.
As expected, when the housing market packed its bags and headed south, the economy took the same trip. In 2006, the national unemployment rate was 4.6%; by 2010, it had reached 9.6%. The Consumer Confidence Index (CCI) hit an all-time high of 144.7 in May 2000; by February 2009, it measured 25.3, the lowest reading ever recorded. Pessimistic consumers kept their money in their pockets, particularly when it came to big-ticket items (read: homes). As the recession dragged on, recovery seemed distant at best.
Signs of Improvement
Economic sectors naturally ebb and flow, but the recent housing market mess resulted—at least in part—from some concrete, manmade causes. While such situations inevitably lead to finger pointing, they also lend themselves (pun intended) to effective solutions. In other words, we can fix what we broke—or at least find an adequate Band-Aid.
New policies, combined with lower interest rates and natural market trends, seem to be getting the housing market back on track. In 2012, we began to see signs of a recovery that is holding steady and even gaining speed. Nationally, new home sales in 2012 reached 368,000, a 20% increase over 2011. As inventory has decreased, home prices have increased. In fact, the S&P/Case-Shiller home price index through March 2013 showed the national composite rising by 10.2% for the past year, marking the fourth consecutive quarter of increases compared to the previous year. Meanwhile, national housing starts have increased by 41% from 2009’s record low.
“It means people are looking more positively at things if they’re willing to go out and buy a new home,” says Bruce Hutchinson, a professor of economics at the University of Tennessee at Chattanooga. “As the housing market picks up, employment opportunities and business opportunities are going to pick up with it.”
True to form, April’s unemployment rate was 7.5%, the lowest it’s been since 2008. And the CCI was up to 76.2 in May 2013, a five-year high that proves Americans are feeling more upbeat.
Granted, after a recession, it’s no secret that we’re a bit easier to please; we’re still nowhere near pre-recession levels. On the other hand, many believe that the highs reached before the crash were too high, and therefore unsustainable. If stability is the goal, it looks like we’re on the right path.
Chattanooga’s Housing Market: How Do We Compare?
The Scenic City is no exception to the national rule: real estate represents a significant piece of our economic pie. According to the U.S. Census Bureau, the real estate, rental, and leasing sector employs 2,394 people in the city. The Chattanooga Area Chamber of Commerce reports that construction, closely tied to the housing market, is the fourth largest sector in the city, totaling 3,196 businesses and employing 5.7% of the city’s workers.
This being the case, it was impossible for the national downturn to leave our city unscathed. According to the Chattanooga-Hamilton County Regional Planning Agency’s “Chattanooga Housing Study 2013,” Chattanooga’s housing market conditions typically lag national levels by several months. In other words, Chattanooga may have been a little late to the party, but the crash—and the damage—was real and measurable.
In 2006, 7,871 pending home sales were reported by GCAR; by 2011, that number was reduced to 5,749. Similarly, 2006 saw 7,870 closed sales, which fell to 5,705 in 2011. Housing starts experienced an initial decline in 2007, and by 2008, they had plummeted. Chattanooga’s home prices also were affected: from 2008 to 2009, the average sales price decreased by 8.4%.
Not surprisingly, the side effects of an unhealthy housing market impacted Chattanooga’s broader economy. The annual unemployment rate more than doubled in just two years, rising from 4.2% in 2007 to 9.5% in 2009, according to the BLS. Some areas were hit harder than others. Dalton, Georgia, known as the carpet capital of the world—and therefore, highly sensitive to housing market fluctuations—lost tens of thousands of jobs when the market stalled.
Still, Chattanooga didn’t experience the same levels of decline as other parts of the U.S. “In some of the bigger cities, where home prices are historically higher, people thought that prices would keep going up and up,” says Chris Brockman, an associate professor of finance at UTC. “We weren’t one of the speculative markets, so overall, Chattanooga wasn’t hit as hard.”
It didn’t hurt that several global corporations set up shop in the region or announced plans to do so in the midst of the Great Recession. Big business created big potential for the job market, boosting confidence just as it was set to fall. Ron Harr, president and CEO of the Chattanooga Area Chamber of Commerce, specifically points to Volkswagen Chattanooga’s $1 billion plant, which began operations in 2011, and Amazon.com’s new distribution centers.
“Both of those companies absolutely delayed our entry into the recession,” Harr says. “They came at a perfect time, right as the U.S. economy was tanking.”
Economic Impact of a Housing Market Recovery
Although Chattanooga’s housing market didn’t nosedive, it still spent a few years moving in the wrong direction, significantly hindering economic growth. Now, like the rest of the nation, Chattanooga seems to be in the recovery zone.
During the past year, real estate has shown real strength: home sales, in conjunction with low interest rates, have gone up. In 2012, pending sales increased by almost 14% compared to the previous year, and closed sales also increased by 14%. Home prices have gone up, too.
The average sales price in 2011 measured $156,375; in 2012, that number rose by about 5% to $164,908. And according to The Market Edge’s “Residential Building Permit Trend Report,” building permits took a dramatic turn in 2012, increasing 27.9% from the previous year.
The local economy seems to be tracking Chattanooga’s real estate recovery. As home sales, housing starts, and building permits increase, other business sectors are being activated, and jobs are being created. The latest numbers from the BLS show Chattanooga’s unemployment rate at 7.4%—certainly down from 2011’s high, but still a ways off from pre-recession rates.
“Chattanooga has a history of going into these recessions a little more slowly than the rest of the country and coming out of them a little more slowly,” Harr says. “And that’s OK. Our economic growth has always been slow and steady. It doesn’t have big spikes, and it doesn’t have big valleys.”
According to Harr, unemployment remains a concern, but ongoing business growth should lead to continued improvement in the job market. Currently, the Chamber is in talks with 40 companies, both domestic and foreign, that have expressed interest in bringing their operations to Chattanooga.
“We’re encouraged that we have a record number of people coming here to look. We continue to enjoy a great reputation in Europe, and we also have a lot of organic growth from existing companies,” Harr says.
Already, eight local companies have announced plans for expansion in 2013. The eight projects will total approximately $10.5 million in investments and create an estimated 886 new jobs. In 2012, 41 new companies and expansion projects were announced, totaling $149.2 million in investments and 2,763 new jobs.
April reports from The Conference Board strongly suggest that our area is showing optimism about current and future conditions. Consumer confidence has risen substantially across the nation, but the biggest year-to-year gains were in the East South Central region: Kentucky, Alabama, Mississippi, and you got it: Tennessee.
Better Times Ahead
The Great Recession took a toll on the entire country, and while Chattanooga didn’t escape its reach, the local economy managed to stay afloat when others were swept away.
“Over the last 30 years, our economy has been amazingly stable and resilient during national economic downturns, both major and minor,” Hutchinson says. “There’s a dynamic working someplace in Chattanooga.”
That’s not to say we’re where we want to be, or that getting there will be easy, but it doesn’t seem we have quite as far to go. And numbers don’t lie: right now, we’re headed in the right direction.
“Some of us with gray hair have lived through other recessions. We woke up one day, and they were over—we moved on with our lives. This one’s not like that. This is a major issue that’s not settled,” Harr says.
“But we’re guardedly optimistic,” he adds. “Chattanooga is faring well because of all of the community decisions that have been made over the past five, 10, 15 years. We continue to attract new things to the community, and that’s bound to pay off.”