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From Location, Location, Location to Jobs, Jobs, Jobs

April 05, 2011 By Lee Egerstrom, Economic Development Fellow

Minnesota’s local policymakers and civic leaders could learn a little something from research out of the United Kingdom when it comes to anticipating changes in our state’s housing market.

We’ll get to the UK in a minute. Here in Minnesota, lawmakers are looking to make deep budget cuts that could eliminate more than 5,000 public-sector jobs.

This comes on top of deep congressional budget cuts that could cost as many as 700,000 jobs across the economy. How many of those losses may impact Minnesota is difficult to guess, but economists from Moody’s and Goldman Sachs are convinced it will hold back economic recovery.

Big layoffs, especially in the public sector, play a huge role in housing markets. Communities with high numbers of teachers, firefighters, police and other public sector workers could be hit by a second foreclosure scare.

Here’s where the UK comes in. British real estate research groups, such as, Hometrack and the Royal Institution of Chartered Surveyors have been handicapping which localized real estate markets will become depressed from public service cutbacks underway there.

Unlike here, the British seem to have a good fix on where public employees live, and that includes college and university towns. While we don’t appear to have similar detailed demographic information, there are community-savvy people in city halls and courthouses that may offer job vulnerability estimates. Local real estate people who know their “locations” would also have a feel for how more layoffs would pressure their markets.

Here’s what the Minnesota housing market looks like now, before any of the proposed cuts are enacted:

In February, short sales of metropolitan area homes rose 0.7 percent, to 5,133 sales from 5,099 sales in February 2010. That was a 12.3 percent increase from the same month in 2009, according to data assembled by the Minneapolis Area Association of Realtors. Short sales are when people unload property for less than is owed to avoid foreclosure or to move on to better opportunities.

Lender-owned sales, however, fell from 5,201 in February 2009 to 2,223 such sales in 2010, a healthy 57.3 percent decline, before jumping back up 74.7 percent to 3,883 sales in February.

Mixed results came from what the realtors call “traditional sales.” That’s where a seller puts a property on the market and then agrees to a price offered by a buyer. These sales still dominate the Twin Cities market, but they declined 10.7 percent from February 2009 to the same month in 2010, from 17,959 sales to 16,043 sales. They fell another 7.5 percent, to 14,845, in February this year, according to the realtors’ group.

Ed Stych, writing in the March 29 edition of Minneapolis / St. Paul Business Journal, noted that Twin Cities metro area home values fell 3.4 percent in January from December 2010 prices as measured by the Case-Shiller Home Price Index. That was the sharpest one-month decline for major metro areas in the nation.

When compared with January prices with the same month in 2010, the Case-Shiller index found the Twin Cities to be the nation’s fourth worst performing metro market, down 7.6 percent, behind Phoenix (down 9.1 percent), Detroit (down 8.1 percent) and Portland (down 7.8 percent).

No matter how you crunch the numbers, the data show we have an enormous weight—the housing market—holding any real noticeable economic recovery back in the Twin Cities and statewide.

For the metro area, one study that takes into account the distances people drive to work—if they are employed—shows the vulnerability that ties homeowners and the housing market to future employment prospects.

This report, from the national Center for Housing Policy and the National Housing Conference, shows that 74.4 percent of metro area residents have housing costs of less than 30 percent of household income, while 21.6 percent are under stress with costs of more than 30 percent of income dedicated to housing. But when transportation costs are factored in, and before the past few months’ higher gasoline costs are factored, nearly 40 percent of metro residents have “H & T”—housing and transportation costs—greater than 45 percent of household income.

Away from the metro area, housing markets around rural Minnesota are coming under even greater strain. The Minnesota Home Ownership Center announced on January 20th that pre-foreclosure notices statewide increased eight percent in 2010, to 71,665 notices of pending actions. Of that total, however, the metro area accounted for 3 percent of the increased notices while notices in rural Minnesota counties increased 15 percent.

This is where “location, location, location” becomes interchangeable with “job, jobs, jobs.” Urban, suburban, exurban and rural home prices all remain under great pressure from continuing public and private job losses and the threat of more that may be coming.

Just as in the UK, this downward pressure on home prices comes from people who will fall behind on mortgage payments and from people who must put their current homes on depressed local real estate markets while they look for housing nearer to new job prospects.

And just like in the UK, the battered housing market will continue to be an enormous drag on economic growth here in Minnesota.

America lost 7.5 million jobs from the 2008-2009 recession. Slowly, U.S. economic recovery is building back jobs in the private sector. These gains are again at risk while government actions add to unemployment and put more pressure on depressed housing markets.

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