The recent economic downturn was one more glaring example of how important new homes and home building are to the United States economy, both directly and indirectly.
The housing market includes the building, selling, and resale of residential homes. But in the same way an earthquake in Japan causes a tsunami in Hawaii, the ripple effects of a housing boom—or bust—have far reaching economic ramifications because the housing markets drive so many auxiliary industries.
New homes, which are considered durable goods, have to be furnished with everything from appliances, light bulbs, and consumer electronics to textiles, paint, and gardening supplies. Goods that are part and parcel of new housing generate state and local sales taxes. Appliances, furniture, building materials and electronics provide a large amount of revenue from sales taxes. So when the housing market goes down, retail sales decline, sales tax revenue shrinks, and local communities and states have less money for services.
During a real estate market decline, property taxes are also impacted, although on a delayed schedule. The amount property owner’s pay in taxes is a percentage of the home’s appraised value; as house values goes down, the amount of money homeowners pay in taxes decrease. A bust like the current one, can and has devastated local economies nationwide.
More houses mean more families in the community which is good for local restaurants, shops, movie theaters and so on. So not only is there a direct economic benefit from new housing, there is an ongoing indirect benefit which is why new home construction is used as an indicator of the country’s overall economic health.
As the recent recession showed, a housing bust can significantly impact financial markets too. As people default on their loans, the values of the houses decrease, which reduces the value of the banks’ mortgage portfolio. When that happens, banks tighten their loan parameters, making it harder for individuals and small businesses to get loans.
“In 2008, NAHB estimates that the impacts include the following:
- 3.05 jobs and $89,216 in taxes (from building an average new single family home)
- 1.16 jobs and $33,494 in taxes (from an average new multi family rental unit)
- 1.11 jobs and $30,217 in taxes (from $100,000 spent on residential remodeling)”
source: The Direct Impact of Home Building and Remodeling on the U.S. economy
The above reasons are why an increase in new construction is considered the first sign of a recovery. It is the engine that drives the financial train. More new homes typically mean more new jobs, not just in construction but in related industries too. As unemployment goes down, consumer confidence increases, which leads to more consumer spending. As business improves, companies hire more workers, leading to more economic growth, higher incomes and more disposable cash. New construction can signal the beginning of a positive spiral of prosperity.
Housing in California, as an Example
The Center for Housing Policy did a study to determine actual cash value of new housing and reported that California, for example, enjoyed “a one-time fiscal gain of $10,479 for each median-priced home constructed and a further estimated gain of $1,869 each year…the vast majority of cities and counties also experience positive fiscal effects, with one-time fiscal gains averaging $759 per home for a typical city and $1,442 for a typical county.”
According to Housing bust withered California’s economy, job market, a recent report issued by the California Homebuilding Foundation, found that services related to housing construction “including remodeling, repair, brokerage, property management and financing and the industry generates more than $347 billion of economic output and supports nearly 1 million jobs statewide.” Additional findings project that a newly constructed residence directly creates 3.24 jobs during construction and indirectly supports another 1.2 jobs.
Over one-tenth of California’s total economic output is from the housing industry. Even during the recent recession, construction still accounted for more economic output than “wholesale and retail trade; professional scientific and technical services and information.”
So the short version is: as goes new home construction goes the economy, which affects everyone.
Do you have any local stories of how much housing impacts your area?
See Also: The Economic Benefits of Housing in California
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I’ve been writing similar things for over a year. With all the money the federal government gave to states, if they’d started working on their infrastructure with construction projects I feel it would have helped jumpstart the economy much earlier and more efficiently.
I am agree with you that building new homes are necessary for USA in this time period. They must have to think about it seriously.