Economists' Outlook

Housing stats and analysis from NAR's research experts.

Even in Bad Times, Real Estate’s Impact is Big

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 [1], 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.

[1] 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.

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