bromselick
9/1/2006 7:38:00 PM
The Economy |
By Andrew Cassel,
Inquirer Columnist --
A blog I look at occasionally featured a heart-wrenching series of
missives last week, from a real estate broker in a fast-growing suburb
of Atlanta. At least it used to be fast-growing.
In January, the broker, a 12-year veteran of the business, wrote:
Business is booming. I know of no one complaining of slow business, or
worried about losing their job. Everyone is too busy making money to
have time to worry... We are seeing lots of money out there... A very
bright year lies ahead.
But 10 days ago, the same broker posted a follow-up:
It's been a "character-building year"... We ended the first quarter
with nine deals pending or closed, which is a very solid start. Then we
hit a brick wall with only three deals in the second quarter. That
would make it our worst second quarter ever in our 12 years. Then it
got worse... .
As everyone from Alan Greenspan to your brother-in-law has been saying
for years now, all real estate markets are local. But when prices go
stratospheric in scores of local real estate markets across the country
- as happened over the last five years - the odds get kind of long that
any local real estate market can defy gravity on its own.
In other words, if you think it's different here - no matter where here
happens to be - think again.
Underlying economic and financial conditions affect everybody, from
first-time home buyers in modest suburbs to empty nesters buying luxury
condominiums.
At the most basic level, the price of real estate cannot keep rising
faster than the incomes of the people shopping for it. Buyers might be
induced to pay up for a while, bubbles can develop here or there, but
over the long run, housing costs and incomes move together. Unless
incomes start growing a lot faster than they have recently, housing
prices will inevitably stagnate or fall.
Then there's the price of money, a.k.a. interest rates. It shouldn't
surprise as many people as it does that home prices go up when rates go
down, and vice versa. A house priced at $500,000 has a lot more
potential buyers with mortgage rates at 6 percent than it does at 8
percent.
But the biggest worry, at least for the immediate future, is the
feedback loop a falling market can create.
As the air comes out of real estate, it affects more than just the
people trying to sell their houses. Brokers such as the fellow in
Georgia have trouble making ends meet. Mortgage bankers see their
business dry up. Construction work for new houses disappears, and sales
of secondary home-improvement items such as curtains and plumbing get
soft as well.
All in all, the fallout can be broader and affect more people than,
say, a slowdown in technology or manufacturing, says Malvern economist
Michael Donnelly. That's because housing is labor-intensive compared
with other parts of the economy.
"When housing starts to go into the tank, you get a lot more layoffs
than in other sectors," Donnelly said.
There was dramatic evidence Friday of how housing could affect the
wider economy, when the government released a surprisingly low estimate
of gross domestic product growth in the second quarter of 2006.
The economy grew at an annual rate of 2.5 percent compared with 5.6
percent in the year's first three months. The slowdown was sharper than
most economists had forecast, and it increased talk that the United
States might be headed for recession this year or next.
Donnelly explains why: Since 1960, housing has accounted for an average
of about 4.5 percent of the total U.S. economy. The proportion
fluctuates; during the recessions of 1982 and 1990, it fell below 3.5
percent.
But since 2000, housing's share of the economy has soared, reaching a
high of 6.3 percent last year. This year it fell back to just over 6
percent.
If that number were to keep dropping to its long-term average of 4.5
percent, Donnelly calculates it would mean the loss of about 1.5
million jobs.
Worse, he notes that the last two times housing hit peak levels as a
share of the economy, deep recessions followed.
That's not a prediction. Maybe this time it'll be different.
But maybe not.