The weak housing sector continues to have a ripple effect throughout the U.S., putting stress on small businesses. Many economic experts say restoring confidence in the housing market is vital to restoring economic growth.
The reason? Small businesses, particularly those that provide related services like landscaping, are closely tied to the housing market, even if they aren’t directly involved in the construction or sale of homes.
Even if a landscape contractor hasn’t been immediately affected by the housing market, he or she has commented on its link to other business pros and cons – from its influence on consumer spending and confidence to its involvement in increasing market saturation in services beyond residential design/build, such as residential maintenance or commercial design/build and maintenance. This is the reason green industry professionals answering Lawn & Landscape’s survey rank inflation and rising interest rates No. 2 – only behind rising fuel costs – on their list of top business concerns.
CONSUMER SPENDING & HOME PRICES. Consumer spending is directly influenced by real estate, making up 70 percent of economic activity and recognized as the lifeblood of countless small businesses. A Congressional Budget Office study estimates each dollar increase in housing wealth translates to 2 to 7 cents of additional consumer spending. Conversely, a 10 percent decline in home prices could slash consumer spending by as much as $103 billion to $316 billion, the CBO study estimates, slicing between 0.7 percent and 2.2 percent from the nation’s Gross Domestic Product.
Sales of new and existing single-family homes have fallen dramatically since the peaks in 2005, but recent data suggest the long downslide is nearing an end, the NAHB reports.
Home prices started to decrease in mid-2006 and gathered downward momentum the first quarter of this year, according to the National Association of Home Builders. But the rate of decline has slowed recently, suggesting the massive imbalance between demand and supply in the single-family housing market is being corrected to some degree, the NAHB adds.
Rising foreclosures have been blamed for part of the dip in home values. But a new study called “The Foreclosure-House Price Nexus: Lessons from the 2007-2008 Housing Turmoil,” contradicts this theory, saying rising foreclosures will not cause U.S. home values to plunge. According to Texas A&M University’s Charlie Hall, “the effects of foreclosure shocks – which promise to grow over the next several months – seem to be smaller than many have feared. Even under their most extreme scenario, the resulting average drop in home prices between 2007 and 2009 would be less than 6 percent.”
The study also explained why one landscape contractor in Dallas can boast about a thriving housing market, while a contractor in Fort Worth can state the opposite. There is no “national real estate market,” Hall says. Instead, real estate markets looked at by zip code show two extremes exist in many major metropolitan areas, meaning “where you live and operate your business certainly affects business performance,” Hall adds.
What’s making people so nervous about the market? “Headlines pointing to extreme circumstances in a few states can be misleading about the U.S. as a whole,” Hall says. “Despite increased foreclosure rates throughout the country, only 12 states are projected to see foreclosure-induced price declines of 6 percent or more through 2009, led by Nevada, Florida, California and Arizona.”
CREDIT MARKETS. Housing also affects small-business credit. According to AllBusiness.com, 45 percent of outstanding small-business loans are collateralized by some type of real estate asset. Small-business owners, in particular, often rely on home equity loans and credit lines. Some say the decline in home prices and in the collateral that real estate represents has damaged this credit.
The Federal Reserve reports 65 percent of the domestic banks it surveyed this summer raised their lending standards on commercial and industrial loans for small businesses, up from 50 percent in the spring. In some cases, this means banks are demanding higher credit scores and want more collateral before lending.
Small-business owners who say they’ve had a harder time getting loans rose to 10 percent this year, according to the National Federation for Independent Business’ September Small Business Economic Trends survey. This compares to only 3 percent in 2003. But NFIB Chief Economist Bill Dunkelberg says the percentage of business owners having difficulty getting loans in previous economic downturns was much higher than today.
HOUSING MARKET PROS. While NAHB says builders continue to cut back on new home production, responding to weak demand and heavy supply in many U.S. regions, “people are still comfortable investing in their current homes and making the most of their existing properties,” says David Frank, president and CEO, David J. Frank Landscape Contracting, Germantown, Wis.
Even the increase in foreclosures has presented opportunities for some. “We’re doing about $1,000 a month or more just in maintaining the landscaping of foreclosure homes,” says Tom Curdes, owner of Weed Man Toledo/Barron’s Lawn Service, Toledo, Ohio.
HOUSING FORECAST. The housing situation is on the minds of most landscape business owners, but it’s something Brandon Rushing says everyone should have seen coming. “The housing market is going down to correct for the 30-percent gains seen for two to five years straight,” says the founder and president of B. Rushing Lawn & Landscaping in Lorton, Va.
Though it’s high on the concerns list, when probed further, only 5.5 percent of contractors chose the credit-financing crunch/foreclosure crisis as the one economic challenge they would fix to aid their businesses in the coming year if given the chance. Maybe they see what the NAHB and Mortgage Bankers Association predict – a light at the end of the housing slump tunnel.
The Mortgage Bankers Association expects housing activity to recover moderately in 2009. “As economic growth accelerates to trend pace in 2010 and credit conditions return to more normal levels, we expect significant improvement in both housing starts and home sales,” the organization reports. SOI