Ask builders where they'd like to expand, or start over (which is more likely the case these days), and eventually they'll mention these and a few other markets, all for the same reason: strong job growth that promises steady home sales for years to come. “We follow growth; we don't create it,” says Lennar spokesman Marshall Ames. Crosswinds Communities CEO Bernie Glieberman adds that his company would “never consider a market without good job statistics.” In 2008, Crosswinds plans to start selling homes and lots in Phoenix, which a recent bizjournals survey identified as the country's hottest job market, expanding at nearly quadruple the national growth rate.
A not-uncommon example of the housing industry following jobs can be found in La Grange, Ga., where an affiliate of Chicago-based developer Marquette Cos. is creating a 400-acre master planned community called Magnolia. With 2,800 homes, the project is designed to capitalize on the local employment boom that's expected to result from Kia Motors' new plant, which will hire more than 2,900 people when it opens in 2009. The Georgia Department of Economic Development projects that the Kia plant could bring a total of 18,000 jobs to the state.
As they've followed jobs, though, builders and developers have been known to take a few detours, especially during the last boom, when exuberance rather than market analysis dictated where they built next. How else can one explain a 51 percent increase in housing starts between 1990 and 2006 when employment during that period increased only 22 percent? Permits in Indianapolis sometimes exceeded jobs created by a ratio of 2-to-1, says Tom Eggleston, CEO of Indy-based C.P. Morgan Communities, which uses a layered analytic model for evaluating a market's potential that gives ample weight to job statistics (see “Do the Math,” www.builderonline.com).
As market conditions have worsened, employment data have gained cachet as a reliable barometer and predictor of a market's economic health. The first sentence in the Joint Center for Housing Studies' latest “State of the Housing Market” report says it all: “The length and depth of the current correction will depend on the course of employment growth and interest rates, as well as the speed with which builders pare down excess supply.” Mark Lautman, director of economic development for Cleveland-based developer Forest City Enterprises, believes that job growth might be even more important now because the market is tighter and riskier, “and people can't afford to make mistakes.”
But the snapshot of a market that job growth exposes can fade from year to year. In 2001, the Santa Monica, Calif.–based Milken Institute ranked San Diego first on its annual Best Performing Cities list, which looks at job creation, wages, and high-tech growth. Five years later, San Diego ranked 72nd, a victim of excessive overbuilding and home price inflation. A recent Wall Street Journal article suggested that Florida could be “over” as a growth market, even after the Sunshine State created 846,000 jobs from 2001 through 2006, or about the same number that California and Arizona combined generated.
Consequently, most builders wouldn't think about expanding without measuring job growth against other factors, such as unsold inventory, household formation, and land-use restrictions. “If you look at jobs without looking at permits,” warns Gopal Ahluwalia, the NAHB's staff vice president of research, “you will be greatly disappointed.” And Brad Hunter, director of market research firm Metrostudy's South Florida region in West Palm Beach, Fla., observes that builders are being more cautious in how they analyze any statistic because “there are opportunities over the next five years that can either make or destroy a company.”
Builders know that job creation leads to more development and competition, sometimes beyond a market's capacity to absorb. Housing analyst John Burns points to Jacksonville, Fla., which wasn't on builders' radars a decade ago. “Then, the city did a very good job attracting employers, and seven to 10 builders moved into the market.”
Despite having one of its strongest growth years in 2007, San Antonio saw its inventory of unsold existing homes jump 72 percent, to 12,190, through the first half of that year, according to Metrostudy's estimates. Another market with steady job growth and lots of space, Raleigh, N.C., has eight of the top 10 builders active there and has seen more developers move in over the past few years. As a result, margins are low, “there are a lot more approved lots in this market,” and local politicians are pushing for slower development, says Tom Anhut, Toll Brothers' Raleigh division president.
Any number of factors can neutralize job growth's positive impact. Dallas has been creating jobs at double the national rate, and CNN/Money recently called it a “smoking hot” real estate market, but builders there complain about mediocre margins kept low by an abundance of developable land. On the flip side, growth barriers in such markets as Portland, Ore.; San Jose, Calif.; and Boise, Idaho, hold development in abeyance.