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How Housing Dealt a Double Blow to Small Business

The slump is hurting contractors and makes it hard to borrow

Keith Sutton has been building homes in Cleveland since 1991 and was selling 20 houses a year at the top of the boom. Today he’s sitting on 50 lots he can’t get rid of and is $3.5 million in debt, including close to $1 million he’s already defaulted on. “I couldn’t have anticipated in 2006 that it was going to last well into 2011 and beyond,” he says. “I thought it was going to be a blip.” Sutton has just two workers now, down from 13 before the bust, and he hasn’t sold a house in a year. “I’m barely hanging on,” he says.

The housing market’s persistent woes weigh doubly on small business. Industries such as construction and real estate are dominated by small companies, and many entrepreneurs borrow against their homes to finance their businesses. That means small business, which accounts for half of private nonfarm gross domestic product and 65 percent of job growth, is unlikely to recover before the housing industry rebounds. “The recent decline in housing prices is significant enough to be a real constraint on small business finances,” researchers at the Federal Reserve Bank of Cleveland concluded in a December report.