Real Estate: The Market Continues to Slow
While the housing market continues to cool off, it is clear that the average price is not falling. Through the end of 2006 and into the first quarter of 2007, there is year-to-year price appreciation. While the prices are not rising at robust rates, the Stateline Region is (so far) avoiding the overall decline in real estate prices occurring in other regions of the United States.
Using a term that is highly applicable (but perhaps repetitious) there is a general disinflation in the real estate market. This is clearly happening. While the price of real estate continued to rise in the last quarter of 2006 and the first quarter of 2007 (Figure 8), the rate of appreciation has lessened relative to earlier, associated quarters. The idea of disinflation needs repeating. It is a slowdown in appreciation (Figure 9), not a decline in prices. It is critical to state early that a slowdown in appreciation is different from a reduction in value: overall price levels have not been falling; they simply may have slower price increases. This is the definition of disinflation, rather than deflation.
The critical issue that requires highlighting is the fact that numbers of homes sold in recent quarters has declined. In the first quarter of 2007, the region saw 952 single home sales. This is down from 1,036 in the first quarter of 2006 and 1,016 in the first quarter of 2005. While prices have risen, the number of sales is falling. There are two considerations to keep in mind regarding this number. First, it can be argued that this is a correction: a decline in sales in the years following a record is not necessarily a failure. It is possible to view the slowdown as a reversion to the mean rather than a collapse. However, since the housing stock has increased over the years, the number of home sales should naturally increase.
From the data, there are a number of observations that can be made. The first is in regard to Walworth County. It is notable that while the sale price of homes continues to rise, the number of sales is falling. This decline, which began in the second quarter of 2006, is continuing. The market has returned to its aggregate sales levels of 2001, a reverse of 5 years of growth up through the first quarter of 2006. While less pronounced, Jefferson County is following a similar track (although a full database for 2001 is not available).
In terms of Rock County, value and affordability continues to be an attraction. This may be a reason why the falloff in sales has been less pronounced there than in Jefferson and Walworth. A similar statement may be attributed to Green County, although the rural nature of the county creates a less dynamic demand situation. In any case, the affordability of these counties is noteworthy in conjunction with the lack of demand decline (as measured by the number of homes sold).
One final comment on the real estate market is how a slowing housing market will affect the overall economy. It is often commented that the new home construction business constitutes 6 percent of the overall gross domestic product. Given that number, a 15 percent reduction in the industry will reduce economic growth by 1 percent. This may explain the slow growth in the U.S. gross domestic product in the first quarter of 2007. However, we have seen very limited documented impact on employment as a result of the contraction. In fact, unemployment rates have remained stable. One explanation comes from the construction industry’s use of both documented and undocumented labor. The slowdown in the construction industry has, however, had a significant impact on Latin America:
Wall Street Journal
Joel Millman
April 23, 2007; Page A2
"Latin America Feels Pain of U.S. Housing Slump"
The slowing U.S. housing market already has taken a bite out of the U.S. economy. Now, the fallout is spreading to Latin America.
That’s because home construction is the principal gateway industry for immigrants entering the U.S. labor market. Those immigrants contribute the lion’s share of the estimated $50 billion in cash sent annually from the U.S. to family members and others in countries south of the border. That tide of cash appears to be ebbing.
Monthly remittances from the U.S. to Mexico have dropped every month since their peak of $2.6 billion in May 2006 — shortly before new-home construction in the U.S. plunged. In February 2007, the latest month for which data are available, remittances to Mexico had slowed to $1.7 billion.
This projects that the initial pain has been absorbed by these workers. However, if the downturn continues, it is reasonable to expect that, as more workers get caught in this market fluctuation, the impact locally will grow.