Special Studies, March 25, 2008

Natalia Siniavskaia, Ph.D.

Report available to the public as a courtesy of HousingEconomics.com

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In 2005 the share of housing in the nation’s total production of goods and services reached a  record 16.6 percent. Since then it has fallen and in 2007 stood at 15.2 percent of the US Gross Domestic Product (GDP). 2005 is also the most recent year for which detailed information about individual state economies is available.

New NAHB estimates show that, in the midst of the 2005 housing boom, many state economies were even more reliant on housing as an engine of economic growth and the source of state income. For example, housing accounted for almost 30 percent of Nevada’s Gross State Product (GSP, the state equivalent of the national Gross Domestic Product) in 2005.  During the same year, Hawaii, Florida, Arizona, California and Maryland each derived more than 20 percent of their respective GSPs from housing. Only in Louisiana (which lost a large portion of its housing stock to Hurricane Katrina, and consequently had an unusually low share of housing services created by the remaining occupied properties) did housing account for less than 10 percent of GSP from housing.

Housing Components in States’ Product

Housing contributes to the nation’s and states’ output in two basic ways: through residential investment and household spending on housing services. Residential investment includes construction of new single family and multifamily structures (which encompasses the value of input materials), residential remodeling, and production of manufactured homes and brokers’ fees. Spending on housing services includes the amount of rent paid by tenants, the imputed value of housing services to home owners, and consumers’ spending on housing services provided by hotels.

An alternate but theoretically equivalent way of measuring housing’s contribution to national and state economies is through the income generated in housing-related industries. This is the approach that NAHB uses to estimate housing’s contribution to GSP. [1] 

Residential Investment 

Through 2005 housing as a share of most states’ economies was rising, due to booming residential construction activity that was evident in the consistently high number of housing starts, increasing remodeling expenditures, and the rising value of new homes. NAHB’s GSP calculations capture this through the rising incomes of home builders, remodelers, industries supplying inputs into home building, producers of manufactured homes, and brokers. Nationally, this income reached the record $768 billion in 2005 and accounted for 6.2 percent of the nation’s output.

The new NAHB estimates show that at the peak of the housing boom Florida, Nevada, and Arizona were deriving more than 10 percent of Gross State Product from home building activities (Table 1), by far exceeding the national average of 6.2 percent. Most of this (roughly 6 percent of GSP of Nevada and Florida, and 5.3 percent in Arizona) was generated by home builders and remodelers. Other states deriving a relatively large share of GSP from residential construction in 2005 included Idaho (4.4 percent), Colorado (4.1), Montana (3.9), and Utah (3.7). At the other end of the spectrum are Katrina-struck Louisiana and Mississippi with about 1 percent each, and the District of Columbia, where home building and residential remodeling generated only 0.6 percent of GSP.

Residential construction not only creates income for those employed in the industry but also for those working in industries supplying inputs to home builders and remodelers. Often these suppliers are located in neighboring or other states. For this reason, home building not only contributes to local economies in the states where it takes place, but also stimulates economic activity across state borders. According to the Bureau of Economic Analysis (BEA), there are more than fifty industries that supply products and services to construction. Miscellaneous professional, scientific and technical services, retail trade, manufacturing of fabricated metal, nonmetallic mineral and wood products are the largest contributors of inputs used in residential construction. On average, this contribution amounted to 2.5 percent of state income, nearly as much as residential construction itself. States like Idaho, Utah, Oregon, California, South and North Carolina, where the production of home building inputs accounted for more than 3 percent of GSP, benefited greatly from the national boom in residential construction in 2005. 

Production of manufactured housing, residential equipment and brokers’ fees on sales of new and existing homes are additional sources of states’ income attributed to housing. These are added together and shown in the “Other Home Building” column of Table 1. This total is largely driven by brokers’ fees. Not surprisingly, states that have high home values and/or saw a dramatic increase in home sales in 2005 top the list. In states like Hawaii, Nevada, and Florida brokers’ fees accounted for almost 2 percent of GSP.

Housing Services

The largest contribution of housing to states’ economies is by the ongoing services provided by the housing stock that was previously constructed by the home building industry. In the case of rental housing this contribution can be measured directly through rent paid by tenants. In the case of owner-occupied properties, a theoretically equivalent income is imputed as if homeowners were paying rent to themselves. (This may seem odd at first glance, but if GSP did not include a measure of owners equivalent rent, an increase in the homeownership rate would cause GSP to decline). Nationally in 2005, existing properties generated $1.2 trillion in owners’ income and taxes, and accounted for 10.4 percent of nation’s gross product.

Hawaii and California derive the largest share of GSP from their existing housing stocks —15.1 and 14.0 percent, respectively. This can be explained largely by relatively high values and rents for residential properties in these states. Next on the list are Maryland (12.9 percent), Florida (12.4), and New Jersey (11.8). On the contrary, an unusually low share of housing services in Texas, 6.3 percent, can be attributed to relatively low rents and property values in parts of that state. In Louisiana, which lost a large portion of its housing stock due to Hurricane Katrina and has relatively low values in most of the state, existing housing generated only 5.4 percent of GSP —the smallest contribution of existing homes to GSP among all states.

Housing services also includes income generated by the hotel industry, but on average this contribution is relatively small, accounting only about 0.6 percent of GSP. However, in Nevada and Hawaii, the hotel industry accounts for an unusually large share of the state economy —8.0 and 3.6 percent of GSP, respectively. This brings both states to the top of the list in Table 1, with overall housing contributions to GSP of 29.5 and 25 percent. In four other states, housing’s contribution to GSP exceeded 20 percent in 2005: Florida, Arizona, California, and Maryland. States where housing accounted for a particularly large share of GSP in 2005 should be especially concerned about the national downturn in home values and residential construction activity that has taken place since then. States’ impact will differ so rankings may change considerably.

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Footnote:

[1] NAHB’s methodology to estimate housing’s contribution to GSP was previously presented and discussed in detail in Housing Economics Online (“Housing’s Contribution to Gross State Product”, September 2005).