The role of real estate in the Tri-Cities economy

It's doubtful there's a person in the room who isn't at least casually interested in the local economy.

 Casually is the operative term.   The unemployment rate and what new restaurant is coming to town dominates local interest unless there's a layoff stealing the spotlight.  But the truth of the matter is that unemployment rate that gets so much attention is a poor measure of the local jobs picture.  In fact, ETSU economists Steb Hipple has called it the most worthless report the federal government produces.

I'm here today to quickly shine the spotlight on the local real estate economy and show you how it's just as big a deal as jobs and retail sales.

Remember your last doctor's visit.  The nurse took your blood pressure, checked your temperature and weighed you. If the pulse is strong and steady and the temperature is pretty close to 98.6 it doc a benchmark to start from.

I'm in real estate.  To be good at my profession, I keep my fingers on the pulse of the local real estate economy. It's strong and steady these days. A solid benchmark. That's a good sign because when real estate comes back, it comes back up like gangbusters. It also leads the rest of the economy out of bad times. That's what happened here in the Tri-Cities.

Politicians like to talk about what they have done or want to do to boost the economy. For the most part, it's empty rhetoric because when it comes to the economy, politicians are a lot like workers at UT's Neyland Stadium. They get to groom the playing field and take the tickets. But they don't control the game anymore than they control the economy. That's controlled by consumers and business people like you, and it's facilitated by Realtors.

Today's information technology has given everyone access to more data and information than at any other time in history.

HOLD UP YOUR CELL PHONE

You have this information at your fingertips 24/7. This thing right here has a faster computer than what we used on the Apollo missions. Almost everyone has one in their pocket.

But faster computers and more information have a darker side. Many of us are information rich and context poor…. especially about the local real estate economy.  That's because much of it isn't about the local real estate economy.

While the most credible information comes from studies and analysis by trained economists or data scientists, it's rarely localized, and real estate is a hyper local. So hyper local that conditions can vary widely from town to town in the same county or even among neighborhoods in the same city. That means you have to carefully vet your information because national conditions may or may not be anything close to what the local market is doing.

It like the man who's driving down a country road while on vacation.

He stops by a farmer watching a flock of sheep grazing in a meadow.

"I'll bet you $100 against one of your sheep than I can guess the exact number in this flock," he tells the famer looking after the sheep.

The farmer isn't about to pass up a sure $100. He agrees.

The man looks over the meadow, does some quick calculations and says, "935."

That stuns the farmer because it's the exact number.  But he's a man of his word, so he tells the stranger to pick out the sheep he wants.

The man pickups an animal and starts to walk away.

"Wait," says the farmer. Double or nothing that I can guess your occupation.

"You're on."

The farmer looks him up and down then says, "you're an economist."

The man is astonished. "That's right, but how did you know."

"Put down my dog, and I'll tell you."

Economists have the skills to identify the big picture – like the number of animals in a flock. But you can't always depend on that big picture to tell you what's most important to you.

What I want to do for just a few minutes is shine a spotlight on the real estate economy and show you how it led the Tri-Cities out of the Great Recession and how it's a critical part of the larger local economy.

A year and a half ago Tri-Cities home sales took off like a rocket. There were some print media stories, but for the most part, it was ignored.

Local media finally got interested this year when a tight inventory finally kicked supply and demand into high gear, and prices began increasing. That's a good thing. But media attention is a fickle thing. Let's dial back the clock for an example.

Back in 2012 when the local labor market was struggling, and 8% unemployment was seen as good news, the local real estate economy was roaring toward pre-recession levels.  Sales and price reports from the Northeast Tennessee Association of Realtors' monthly Trends Reports got some attention. And those early reports were spot on. But they went pretty much un-noticed. They were lost in the avalanche of national information that floods over us every day just like President Trump's tweets.

The truth of the matter is most consumers pay attention to what's happening on the national level but shrug off the local trends. But when it comes to the information that affects you the most the difference between national and local information is the difference between a lightning bug and a lightning bolt. There's a bunch of politicians in Washington who probably would take exception to comparing their antics to lighting bugs, but it's a fact. 

Consider this.

If you compare the average sales price of a local home bought in 2012 when NETAR's indicators were pointing to recovery and compare it to the average sales price in this year - it had increased a little over $15,000 – a solid 11% price appreciation.

Now back to the big picture.

Last year was a monster year for housing all over the Tri Cities Region including SW VA. Existing home sales soared to over 6,000 a year for the very first time. And the combined sales dollar volume for single-family homes and townhomes exceeded ONE billion dollars. It was an all-time high for our regional real estate industry. And that was just home sales marketed by the 1,200 professional Realtors at NETAR. It's about 75% of the total market share. That billion-dollar figure didn't include direct developer-to-buyer new home sales, manufactured home sales, land sales or commercial property sales.

There's no argument about it being an eye-popping number, but there's more to the story …… much more.

Every other year Harvard Joint Center for Housing Studies teams up with the National Association of Realtors research department for a drill down on how real estate sales affect the economies of every state in the nation. With a little tweaking that state-level analysis can be adapted for some all-important local context.

Here's where the rubber meets the road… Where you can begin to see the affect the real estate economy has.

When a home is sold in the Tri-Cities income generated from real estate related industries is over $14,000. That sweeps real estate brokerages, mortgage lending, title insurance, home appraisal, rentals, and leasing, moving truck services and related activities into the mix.

Additional spending on things like furniture, appliances, and remodeling adds another $4,800.

It also generates an economic multiplier impact..….more spending at restaurants, sports events and things like that.  The 2016 multiplier was $9,300 per home.

Existing home sales also stimulate added home production. Typically, one new home is constructed for every eight existing home sales. So, for each existing sale, 1/8 of a new home's value is added. Our new home industry hasn't recovered to the extent it has in other markets so that part of the equation is less than the statewide figure. Still, it added another $11,800 to our example.

Add them up……. every existing home sales generates about $40,000 in the local economy.

Last year there were nearly 6,100 local single-family sales, so the total income derived from them was almost $240 million.

But that's the just the residential resales side of the real estate story.

Let's quickly look at the new home and commercial real estate construction picture.

It's a good feeling to drive around the area and see all the new homes going up. It a good sign even through the local new home construction industry is performing at a little less than half of its pre-recession level.

Still, even at half-speed, the economic impact is nothing to sneeze at. The market value of new homes permitted last year exceeded $220 million dollars. The projection for this year is a 7% increase in permits.

Last year wasn't a banner year for new commercial real estate developments. It was basically unchanged from 2015 and on a slow-growth pattern with an emphasis of repurposing existing property. And unlike residential real estate which is driven by demand, commercial real estate is driven by the business cycle and the funding by local lending institutions.

Still, last year's commercial real estate developments value added another $317 million to the economy.

This is a good place for another quick sidebar on commercial real estate.

When a new restaurant, business or company moves to town, there are always pictures and quotes from the local politicians and economic development agencies. But behind the scenes, there's a cadre of professional, full-time commercial Realtors who did much of the heavy lifting to secure the land or buildings that new business needed. And because they have their fingers on the pulse of the local economy and what's happening in the local commercial real estate market they are on call when an investor or business prospect has a need. They are the economic development dynamic you rarely hear about. So are the over 800 commercial properties NETAR commercial Realtors have on the regional commercial multiple listing service website that receives world-wide viewership.

Another important part of the local real estate industry's impact is the employment angle.

The latest Census Bureau business patterns information we have lists 350 area firms with 1,600 employees in the real estate sales, rentals and leasing business. Now add mortgage brokers and their employees, appraisers, home inspectors, insurance agents, real estate law firms, developers, housing contractors and sub-contractors, construction workers and the legions of others who depend on real estate and homeowners as a key revenue stream for their business.

There's no way around the fact that real estate provides many strong treads to the fabric of the local economy.

Here's another fact that doesn't get much notice.

The Northeast Tennessee Association of Realtors is the only local trade organization that has shaken off its city-county identification to take advantage of a more efficient and effective regional organization consolidated over 20 years ago and confirming that regionalism works.  It currently has over 1,200 members –  70 of them specialize in commercial real estate - and more than 80 affiliates.

I said earlier that real estate led the Tri-Cities out of the Great Recession. It's still leading what has been a soft recovery. A recent analysis of key economic sectors by the National Association of Counties gave housing a recovered status in every county in the Tri-Cities.

Many other benchmarks like jobs and wages got a "no" vote in many counties.

So where are we now?

Residential real estate is in pretty good shape. New home development is weaker than some would like but a 7% growth projection for this year is pretty good.

 Commercial real estate is in a slow growth mode…the kind that's stable and doesn't provide many surprises. Redevelopment and repurposing existing commercial locations is the trend with minimum new green field prospects.

Currently almost half of all the homes in the Tri-Cities have no mortgage. Most of those homes belong to Baby Boomers.  The oldest of that generation is now 70 and 15 more turn 70 every day. That pattern won't end anytime soon.

The latest data also shows about 30% of the local homes with mortgages are equity rich. That means they are worth at least 50% more than the mortgage opening a strong demand for retirement style housing.

Let me say that again. Almost half of the local homes are mortgage free, and almost a third of those that are mortgaged are equity rich. That means there's a lot of housing wealth out there.

In conclusion:

Real estate is a cornerstone of the local economy.

Residential real estate provides housing for families. It's the glue that helps hold a community and its economy together. It's also often the greatest source of wealth for many locals.

Commercial real estate - which includes apartment buildings - creates jobs and meets the every changing demand for retail, office and manufacturing space.

Real estate businesses and investments provide a source of revenue and employment for thousands of local residents.

And last – but not least – the housing market is an economic impact factor. According to UNC Wilmington, each newcomer who settles in a city or town generates $25,000 a year consuming services and creating demand for jobs in medical, pharmacy, finance, insurance, real estate, food and retail. Last year the population grew across the region by almost 700 people who collectively added about $175 million to the economy.

That's the abbreviated story about the local real estate economy. It may not be as comprehensive as the economist calculating the size of the sheep flock, but hopefully, it gives you some insights that will make you more like the farmer when you look at news reports that are focused solely on national numbers.

For a copy of the Power Point presentation click the link

 

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