On Monday I talked with Geoffrey Hewings, a professor of geography, economics, and urban and regional planning at the University of Illinois at Urbana-Champaign. The director of REAL, the university’s Regional Economics Applications Laboratory, Hewings tracks residential real estate across the state; his forecasts are part of the Illinois Association of Realtors’ periodic reports. In the organization’s latest report, released at the end of July, Hewings predicted that prices here will continue to drop through September.
Deal Estate: When do you think we will hit bottom?
Geoffrey Hewings: We haven’t done our annual forecast yet, so I don’t look beyond September with any degree of certainty yet. But I will say that most [economists] now see this as a two-year hiatus for real estate.
DE: What factors are still holding back a recovery?
GH: When you try to relate the housing market to what’s going on in the economy, there’s not a lot of optimism there. In all of last year, the Chicago metro area added 38,900 jobs; through the end of June this year, Chicago added only 2,500. [In total] the state added 42,000 last year and only 8,000 so far this year. What’s interesting here is that last year Chicago accounted for 85 percent of the jobs, but this year we’re only 28 percent. This is a delayed reaction; Illinois is now experiencing what the rest of the country experienced six to nine months ago.
There’s been a consistent pattern since 1990: Illinois creates jobs at about half the rate of the United States. So the concern is the capacity of the [regional] economy to expand. I look at job creation as a strong indicator of which way housing will go. If we don’t create jobs, that doesn’t create demand for housing—and if housing demand isn’t there, we don’t create jobs.
Another signal from the economy is the increasing number of people working part-time who want to work full-time, and the number who have had their hours reduced. When you add those up over several million households, it becomes very significant.
DE: The federal housing bill includes incentives for certain people, particularly first-time buyers, to buy a house. How does a single home purchase help the bigger economic picture?
GH: We hear a lot about the ripple effect of the decline in construction, but that’s only part of the picture. People don’t realize how buying a home ripples. Some colleagues at [Chicago’s] RCF Consulting last year estimated that transaction costs in a housing sale—the brokers’ fees and loan origination fees and so forth—for a median-priced house in Illinois are about $28,000. Multiply that by the number of sales, and [residential real-estate transactions] generate $1.3 billion in economic activity. The number of real-estate sales is running 30 to 40 percent lower this year, so you’re losing [$390 million to $520 million] in economic activity.
Then look at what’s happened to places like Home Depot and Lowe’s. People aren’t running there to buy paint or fix up the appearance of the house to put the house on the market. The ripple effect of the turnover of houses is very significant, without even mentioning the loss of construction activity.
DE: How does the loss of construction jobs ripple through the economy?
GH: Something we want to monitor closely is immigration. The Chicago region on average attracts about 30,000 immigrants every year, and there is rather significant evidence nationally that with the slowdown in construction, the rate of immigration has decreased from Mexico, Puerto Rico, and Central America. Now, the Chicago economy has relied very heavily on immigration in the last decade or so to help fuel activity. If this ends up slowing, that’s another effect we’re going to need to get our arms around before we see a recovery.
DE: What about the national picture influences your analysis of the prospects for the housing market?
GH: Nobody’s really addressing the issue that we’ve got a huge liability called Iraq and Afghanistan for which we have not paid. Nobody wants to connect those dots because it seems political. But I’m sorry: you can’t run two wars on credit and have it not impact the economy at home. If we’re borrowing money to run these wars, then a percentage of our national resources is essentially paying off debt rather than being invested in our own country.
I want to be bipartisan and say that what’s going on in Springfield—or what’s not going on—is also having an impact. We’re getting a double whammy here in Illinois. If these deficits are not addressed, our competitive edge as a nation, our investment in human capital, is being compromised. In the long term, that is not good news. We’re not building what I would regard as a sustainable economy.
DE: You’ve painted a pretty dreary picture today.
GH: I know, it’s really depressing. It’s not going to soothe anyone. There are pockets of strong housing activity within Chicago, but generally the picture is depressing. I think the greatest beneficiaries of all this may be the psychologists.