Tuesday, January 18, 2005

Houses Drive Growth At The Local Level

When a new home comes on the market, it is another sign of how the real estate industry drives the economy. A house, unlike any other large purchase product, is a culmination of hundreds of products and services in one purchase, which explains partly why houses cost so much.

The Commerce Department reported last week that new-home sales across the U.S. unexpectedly rose 0.2 percent in October -- the third-highest level on record. At the current rate, builders will sell more than 1.226 million units in 2004. The median sales price of a new home is also on the up, standing at $221,800. The average price was $286,700.

As the economy continues its strengthening exercise, we should see even stronger demand for new homes in the coming months, especially if interest rates remain under 6 percent.

If you consider what it takes to build a house, you'll understand why a strong real estate market feeds the economy with such healthy financial nutrition. The builder isn't the only company finding work when you decide to buy a house from him. You would expect the builder to have his own construction crews -- and most do -- but then he may subcontract the finish work to other companies.

After the builder, there are the plumbers, electricians, drywall hangers, painters, window installers, siding installers and brick layers, and landscapers who will all benefit from the sale of a new home. Many of these folks don't work for the builder, but rather have their own companies.

Just in this group, you'll begin to understand how much product is being created for the building of one house, not to mention a whole development (with hundreds or thousands of homes) being constructed. If builders sell 1.226 million houses -- that means 1.226 million orders for flooring, hot water heaters, concrete orders, roofing supplies, electrical wiring, indoor plumbing, etc. For some manufacturers, it's an even larger boon to their business -- there aren't too many one-bathroom houses, thus the makers of bathroom items, such as commodes, sinks and vanities receive double and even triple orders when a house goes up; most homes have five major appliances -- meaning the 1.226 million homes interprets into 6.13 million washers, dryers, stoves, dishwashers and refrigerators.

Manufacturers of all the products put into your house benefit. Makers of bricks, siding, lumber, steel, electrical wiring, insulation, windows, roofing, flooring, concrete, asphalt, plumbing, just to name a few, all benefit largely when the new-home business is booming.

And while you have the specialty tradesmen who are employed for such a venture, you also have to take into account the people who deliver it -- the workers who load the trucks, the truck drivers and the mechanics who keep these trucks running.

Utility workers also get busy to wire the house for phone, internet, cable and satellite hookups -- 1.226 million orders this year (just for the new houses).

Once the house is built, then there are the inspectors who will determine that the house is in good shape, followed by a whole separate line of professionals involved in the sale of the house. Realtors start the marketing and sales process and once they bring in the buyers, mortgage, insurance, and title companies line up to help finish off the process.

But the economic impact isn't finished at the settlement table. New furniture, window treatments, more paint, wall paper, electronics, and all the gadgets that make a house a home get purchased as well.

Probably the final business to get in on the score are the credit providers. Once homes settle, credit card companies and home equity loan providers pull down the deed records to market to homeowners to see if they want to charge all of the residual purchases.

Yep, it's a great thing when the new-home numbers are up. It's a great thing, indeed.

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