Posted 4/1/2013 12:00 am
Updated 8 months ago
Get on board. The train is leaving the station. The housing industry is back on track and moving out. And along with it, consumer confidence is improving, adding value to a growing economy — a slowly growing economy — but one that is chugging ahead nonetheless. Will it pick up steam in the months to come? We think so — albeit with varying speed and some stops along the way. But the housing train and its pervasive impact on overall economic vitality, driven by consumer spending, are again advancing.
Builders, Building Suppliers and Jobs
Enough with the train metaphor. The bottom line is, those industries that participate in supplying the housing market, from land development to lumber to household hard goods, will benefit greatly as housing inventories are reduced and more construction is framed up. Important, too, will be the positive impact on consumers. Home prices and existing home values are now increasing. In fact, the year-over-year increase in Arkansas home value exceeds 8 percent, according to Zillow, the online real estate database.
Around the country there appears to be a new demand for housing. The National Association of Home Builders reports construction activity has increased over the last year across “primary sectors” of homebuilding: single-family, multifamily and remodeling. And that growth means good news for businesses supporting residential construction, “including building suppliers and other associated enterprises.”
As new construction opportunities relate to job growth, there seems to be a lag. Segments of the population usually drawn to construction work have moved on to other employment categories and are reluctant to rejoin the homebuilding community, largely populated by immigrant workers. The dramatic post-2007 slump in the industry, exacerbated by the volatile nature of residential construction work during the recession, has provided disincentives for workers to return. However, the upswing in construction job opportunities and the wages that will surely accompany a need to fill newly available construction jobs should mitigate the current employment shortfall.
The Wealth Effect
Home values, particularly when they are rising, impact consumer spending through what economists call “the wealth effect.” This effect acts as a stimulus to homeowners who will increase spending in relation to anticipated changes in wealth over time. A common rule of thumb, according to a Bank of America senior economist, is that for every dollar increase in housing wealth, consumers will purchase an average of 4 cents more. Be that as it may, what is reasonable to assume is that as housing values increase, homeowning consumers have more confidence in their personal and household economy and will, in turn, be more apt to make purchases with discretionary income — remaining monthly income after taxes and payments necessary to meet current bills.
The wealth effect is believed to be fairly widespread due to the fact that financial portfolios are significantly made up of home values. Federal Reserve researchers believe housing is “of greater importance than financial assets for the wealth position of most families.” So it would reasonably follow that if home values are increasing, overall household assets likewise increase, making consumers more confident, and perceived purchasing power more prevalent.
Renewed Economic Benefits
In addition to the positive impact housing has on consumers, a renewed acceleration of new-home construction and growth in the housing industry directly benefits the whole economy. In fact, it has been reported that for every new single-family home that is built, three jobs in the community are created. About half of those jobs come from the actual construction. The remaining jobs are spread over other economic sectors, with manufacturing ranking second. And in a state like Arkansas, with a strong wood-products industry, jobs are created and supported the more housing rebounds.
For the overall economy, and for those not directly involved in the housing industry, homebuilding increases the property tax base, which creates greater revenue to support local schools and other community services.
Home values are increasing and consumers are taking notice. As an economic engine, housing impacts us all. It’s a good train to be on.
(Craig Douglass is an advertising agency owner and marketing and research consultant.)