Tuesday, February 22, 2011

Housing’s Role in the Road to Recovery

By Brian Summerfield, Online Editor, REALTOR® Magazine

The National Association of REALTORS® took out a full-page ad in this past Sunday’s edition of the Washington Post to get across a simple but important message: Housing creates jobs, which America needs for a genuine, complete recovery. Indeed, much of the positive economic news that’s come out recently — even in real estate — has been tempered by the enduring high levels of unemployment. Although those figures have improved incrementally over the past couple of months, the unemployment rate is still more than 9 percent, well above historic norms, and when people who have stopped looking for jobs are factored in, it’s much higher.

The aim of NAR’s ad was to advise policymakers and Congress, in advance of the release of President Obama’s Fiscal Year 2012 budget today, that certain changes to the mortgage interest deduction or government involvement in the secondary mortgage market — however well-intended — could have disastrous consequences for the economy. Conversely, by supporting policies that foster home ownership and purchases, they can help create the necessary conditions for a turnaround.

(Note: There is a provision in the 2012 budget that would limit the value of all itemized deductions, including the mortgage interest deduction, to 28 percent for taxpayers in higher brackets — households earning more than $250,000. The proposal is similar to a provision included in last year’s budget proposal, which was rejected by Congress.)

In fact, according to NAR, for every two new houses sold, a job is created. This argument rests on measuring gross domestic product (GDP) as the sum of all income. NAR estimates that each existing-home sale at the median price creates $30,792 because of commissions, fees, moving expenses, furniture, and a “multiplier effect” due to reinvestment of capital from a home sale into the economy. For a new-home sale, nearly $28,000 more is added to that because of spending on materials and labor for construction.

So, let’s say you add two new-home sales together. That adds $117,058 to the economy. Now, divide U.S. GDP by the number of payroll workers, and you get approximately $113,000. (NAR acknowledges this is an overestimation of salary income since income can be earned from profits, rents, and other sources, but does provide a ceiling to earnings per worker.) In other words, these two transactions pump enough money into the economy to pay another worker. And if you substitute average earnings — about $57,000 — for the GDP-divided-by-payroll-workers formula, that jumps up to two jobs.

Now, this is all theoretical, but there’s no denying that just a few transactions can have a significant economic impact on localities — with respect to people’s livelihoods, home values, and viability of communities. The housing sector won’t be the only thing to restore the vitality of American economy, but it will play an important part.

Learn more about why home ownership matters for economic recovery.

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