The Residential Ripple Effect

The U.S. housing slump has had an obvious effect on residential construction-related industries. Just ask Home Depot, Sears or paint maker Sherwin-Williams — they’ve all seen stock and/or profit decline this year due to it.

Rising home values increased personal wealth in recent years —
and now, some analysts worry a further decline in home prices
will kill consumer spending and push the U.S. into a recession,
according to David C. Wheelock, an economist at the Federal Reserve Bank of St. Louis.

The residential market has long been considered to have a key influence on the economy, and as it struggles, other areas generally unrelated to construction are beginning to feel the burn.

Some of the affected:

• Lending institutions. Capitol One last week announced it would cut 1,900 jobs and close its mortgage banking unit,
  GreenPoint, which has 31 locations in 19 states. Countrywide Financial Corp., the biggest U.S. mortgage lender, cut 500 jobs, according to the San Francisco Gate.

• 
  Business spending. During the first part of the year, businesses let inventories run down and spent sparsely — although things have picked up since, Crain’s Chicago Business reports.

• Retail. One would expect retail to suffer, too — since retail construction
  typically follows suit with residential as neighborhoods grow — yet
  retail sales rose unexpectedly in July 0.3 percent. However, there are
  signs the growth may not continue: In California, one of the
  hardest-hit states in the housing slump, statewide retail employment
  dropped by 3,800 in July in part because consumer spending has
  decreased in light of residential value and construction declines.

Overall consumer spending makes up about two-thirds of economic growth, according to Chicago Business. So the July bump in spending gave many in the industry hope the economy would soon return to a more robust state.

In 2001, the booming telecommunications industry bust suddenly — revenues grew at an annual rate of just 15 percent, compared to 34 percent the year before — because of a decreased demand and an over-competitive market that led to price and operating cost pressure.

However, the telecommunications bubble bursting was also widely attributed in part to the sluggish economy that existed at the time — whereas the housing slump emerged from a strong economy and slowly is dragging it down.

A high foreclosure rate, dramatically different property values and rising mortgage interest rates are cutting into personal wealth, and unless that cycle is stopped — sooner, rather than later — it seems the economy won’t be able to catch a break until sometime next year.

Which industry will be affected next? Only time — and the economy — will tell.