In a twist of irony, the states hit hardest by the now-burst housing bubble could be among the earliest to recover from the devastating recession that resulted, outpacing the rest of the United States as soon as 2011.
“They’ve had a steeper decline, but they will have a stronger recovery,” predicted Luke Tilley, senior economist for IHS Global Insight’s U.S. regional service, in a recent online presentation. He was, of course, referring to the “housing states” of California, Arizona, Nevada, and Florida, which benefited mightily in terms of tax revenue, population growth, and new jobs during the boom.
According to Tilley’s analysis, these four states experienced more than their share of new-home construction, as evidenced by the numbers. In 1995, he said, these housing states accounted for 19% of U.S. households and 22% of housing starts. A decade later in 2005, as the peak was approaching, these four states had grown their share of U.S. households by only percentage point, to 20%, but their share of housing starts had grown by 7 percentage points, to 29%.
Such growth created state and metropolitan economies highly dependent on housing-related jobs. “They were setting themselves up for the fall, as we now see,” Tilley said, noting that in 2005, construction and finance-related jobs (i.e., mortgages) contributed roughly 7% of all employment growth in these housing states of Arizona, California, Florida, and Nevada. Three years later, in 2008, those same sectors represented 7.5% of the job declines in these states, according to Tilley.
The good news is that in terms of home prices, California and Florida may be reaching the bottom in terms of home prices in the first quarter of this year, according to Tilley. (Other regional economists have less rosy projections, particularly for Florida.) He anticipates that Arizona will reach its low point in 2009’s second quarter, followed by Nevada in the third quarter.
Unfortunately, the jobs situation—always a lagging indicator for the economy—won’t crater until later this year, at the earliest, according to Tilley’s analysis. Nevada will be the first to slide to the bottom, with an unemployment rate of (ouch) 10.1% in 2009’s third quarter. Tilley expects the other three housing states—California, Arizona, and Florida—to reach the bottom as far as jobs in 2010’s first quarter, with “trough” unemployment rates of 10.5%, 8.8%, and 9.5% respectively.
When employment does rebound, though, these states should be able restart their economic engines relatively quickly with their choice of workers. In contrast, manufacturing states such as Michigan, Indiana, Illinois, and Ohio may never recover the factory jobs they have lost during this recession, said Mike Lynch, an economist with IHS Global Insight’s U.S. regional service.
The much-discussed stimulus package could certainly help Arizona, Nevada, California, and Florida, although it’s difficult to predict the impact until the bill is finalized. “Infrastructure spending has its merits but it remains to be seen whether the allotment can be spent as quickly as designed,” Tilley said via email after the Web presentation. “There are likely not enough contractors available to carry out the work as fast as the [Obama] administration would like.”
For unemployed builders and contractors, though, the jobs created by the stimulus bill could be a lifeline. “I think green [projects are] a way to get some of these jobs back,” Tilley said during the Webinar. “Making buildings more energy-efficient is really the low-hanging fruit. There’s a lot of construction people who are out of work, and it takes less training to teach them how to build green or install [energy-efficient features] than it does to teach them now to build a solar panel. This could be a driver for recovery.”
Finally, the housing tax credit, despite its reduction to $8,000 in the final bill, should offer some hope to the housing markets and economies of these four states. “The housing tax credit needs to take shape before we can say anything definitive,” Tilley said in his email, “but it should help the housing states relatively more than others, as they have bigger housing problems and relatively more people can avert delinquency as a result” if they are able to finally sell their home to a buyer rather than let their home go into foreclosure.
Alison Rice is senior editor, online, at BUILDER magazine.