Homebuilders Still Optimistic, Driving Wider Economy

Homebuilders have gone back to a more optimistic frame of mind last summer, with confidence not dropping into pessimistic territory since.

During the worst of the recession, the confidence of homebuilders nationwide was absolutely crushed, at one point reaching 9 on the National Association of Homebuilders’ index of homebuilder confidence — on which the threshold for optimism is 50 (at that point, more builders see conditions as good than poor). And for good reason: nobody was buying, or buyers were taking advantage of low prices on distressed properties. It was a long slog back to 50, but homebuilders finally reached a more optimistic frame of mind last summer, and the index hasn’t dropped into pessimistic territory since then. The NAHB put its index at 57 in January, down a bit from 58 in December.

The NAHB index might not measure housing starts or existing home sales, but it’s still an important reflection of the state of the homebuilding industry, which is a pillar of the wider economy, besides leading the way for other kinds of property development. In the traditional suburban model of growth – hardily endorsed by urban planners 50 years ago, but often decried these days as sprawl – houses come first, followed by retail and eventually office development. But even in the currently movement of people to urban areas, residential development still tends to come first. Develop or redevelop places to live in the city, and other kinds of development will catch on as well, to service the influx of residents.

How important are new residences to the economy? According to an NAHB report released during the worst of the recession — when it was painfully clear that the contraction of the housing market had been one of the leading causes of the economic turmoil — homebuilding generates substantial local economic activity. That wasn’t news: but the association also came up with a model to quantify those economic benefits. The model captured the effect of construction activity, the ripple impact from construction income, and the ongoing impact of residential property being occupied by owners who pay taxes and buy goods and services locally. All of that creates demand for other kinds of properties to support those goods and services.

The NAHB noted that building 100 single-family homes in a typical metro generates $21.1 million in local income, $2.2 million in taxes, and 324 local jobs, for the year in which the properties are built. After that, the annually recurring impact is lower — $3.1 million in local income, for instance – but steady. Likewise, multi-family construction (100 rental apartments) produces $7.9 million in local income that first year, $827,000 in taxes, and 122 local jobs, with a lower but persistent ongoing impact.

The report also noted the impact of 100 houses, and 100 apartments, on various local industries. Of particular interest are the bump ups for real estate, services to dwellings and buildings, retail trade, eating and drinking places, and entertainment: all receive some benefit from the construction of new residential properties in their vicinity. “A household moving into a new home generally spends about three-fifths of its income on goods and services sold in the local economy,” the report explains, detailing the ripple effect of new housing. “A fraction of this will become income for local workers and local businesses proprietors. In a typical local area, the household will also pay 1.25 percent of its income to local governments in the form of taxes and user fees, and a fraction of this will become income for local government employees.