The decade-long housing boom may not be over yet, but it's showing the first signs of slackening. Prices are off their peaks in a few markets, such as Manhattan; the rate of price increases has slowed in hotbeds such as California and Florida; and houses are staying on the market longer. Meanwhile, Americans' finances are so stretched that they're actually spending more than they earn -- the savings rate has turned negative. Housing affordability is already at a 14-year low. And the Federal Reserve, fearing an outbreak of inflation, keeps jacking up short-term interest rates, gradually hiking borrowing costs for both builders and buyers (for a look at some affordable "American Dream" homes in the Northeast, see our slide show).
That's raising a crucial question: If the housing market turns south, where is the economic damage likely to be the greatest? Places where prices fall a lot will feel the hit, of course. But the greatest economic impact may not come where prices slide the most. Instead, the regions that see the most pain probably will be those where homebuilding has been a major source of new jobs. A decline in housing could accelerate job losses in the entire local economy, as happened in Los Angeles in the early 1990s, when aerospace layoffs and an ensuing housing slowdown led to a 10% decline in overall employment.
Housing matters so much because it has powerful spillover effects. A pair of just-completed studies by the National Association of Home Builders estimate that building 100 single-family homes generates about 350 jobs for a year, 280 of which are local.
The most vulnerable spots, according to a new analysis by BusinessWeek, include the Riverside-San Bernardino (Calif.) region -- the so-called Inland Empire east of Los Angeles -- San Diego, Phoenix, and Las Vegas. In each of these areas new jobs in construction accounted for over 20% of total payroll growth in the past year, vs. a national average of 10%. This measure counts more than just housing construction. But often the construction of other things, such as roads, schools, and malls, follows the building of houses.
In the East, regions that depend heavily on construction employment for growth include Tampa-St. Petersburg and greater Baltimore. In Newark, N.J., and in the nearby wealthy New Jersey surburbs of New York, rising construction employment is partially masking a decrease in other kinds of jobs. Patrick J. O'Keefe, CEO of the New Jersey Builders Assn., says housing starts are running at their highest since 1988 even though the state economy is in a lull. "In the face of a slowdown, it's hard to say which other sectors of the economy would step up to maintain current employment levels," says O'Keefe.
Surprisingly, some of the areas that have seen the biggest runup in housing prices aren't overly vulnerable to a homebuilding slide. Pricey metro New York, for example, is below the national average for new jobs in construction over the past year, with only 8%. Washington, D.C., is right at the national average, with 10%, Miami is at 7%, Boston 11%. Why so low? Construction in these coastal cities has been constrained by severe zoning restrictions, along with a shortage of open land. While these factors drive prices up, they make local economies less dependent on construction for growth.
Other regions would also come through a housing downturn relatively unscathed. Most Texas cities, for instance, are doubly insulated from a downturn. Housing price hikes been moderate, and construction is a small part of payroll growth: 2% in Dallas, 9% in Houston, and -2% in San Antonio, where construction employment has fallen.
FORMER CITRUS AND DAIRY FARMS
Contrast that with housing's role as an engine of growth in Southern California's Riverside and San Bernardino counties, which stretch east to the Arizona and Nevada borders. Thanks to inland prices that are far cheaper than those along the coast -- median-priced properties run about $100,000 less than those farther west -- construction is hopping. Subdivisions are being erected by the score in former citrus groves and dairy farms. In the more populated western portion of Riverside County, homebuilding is proceeding so quickly that a regional fee on new homes to fund new roads has raised more than $200 million in the last 2 1/2 years alone.
While construction by itself accounts for 33% of new jobs in Riverside and San Bernardino, that share reaches 39% when jobs in lending, real estate commissions, renting, and leasing are included. And it's not just roofers and real estate agents who are finding work plentiful. Also raking it in are small businesses catering to the trend, such as Taylor's Appliance in Riverside. The family-run retailer has added 16 new employees in the past five years, bringing the total to 48.
Nor is the construction-related job boom solely a West Coast phenomenon. Across the country, in the Baltimore-Towson (Md.) metro area, construction jobs grew 3.7% over the past year even though open land is far more sparse than out West. Not surprisingly, related industries are also soaring. The Maryland Association of Mortgage Brokers, for instance, has swelled to 1,500 members, more than triple the number a decade ago.
Regions that are heavily dependent on housing for employment growth will suffer more than most when a downturn comes. And there's no doubt that a reversal in the market will come eventually. Nationally, the economy's dependence on housing is worrisomely heavy. Since the beginning of 2000, residential investment -- i.e., the construction and remodeling of homes -- has grown 32% after inflation, more than double the 14% growth of U.S. gross domestic product. Economy.com Inc. chief economist Mark M. Zandi calculates that one-fourth of America's economic growth since 2000 is due to housing.
Builders in fast-growing areas such as Riverside-San Bernardino say they expect housing to remain healthy because of strong pent-up consumer demand. While that could turn out to be true, it's also the kind of talk that is heard in every boom. Technology companies said the same thing in the late 1990s right before corporate spending on technology nose-dived. What housing has given to some metropolitan areas, it can just as well take away. While construction helped buoy the economy through the 2001 recession, it dragged down the overall economy in the more typical 1990-91 recession. From the first quarter of 1990 through the first quarter of 1991, inflation-adjusted residential investment fell 19%, vs. a decline of just 1% for overall GDP.
Falling home values are no fun anywhere. But if you want to know which metro areas will really take it on the chin when prices stall out, look for the ones whose jobs depend on it.
By Peter Coy in New York, with Paul Magnusson in Washington and Christopher Palmeri in Los Angeles