THE RETURN OF RHODE ISLAND'S HOUSING MARKET

The Providence Business News, July, 1997

A consensus regarding the Rhode Island housing market has recently emerged. After years of weakness, it appears that we are finally witnessing true strength in our housing sector, the type we have failed to see throughout this entire recovery. Of course, this is only logical since the Rhode Island economy is doing so well - we are finally returning to more "traditional" patterns of cyclical economic activity.

Well, yes and no. While Rhode Islanders were far too pessimistic about their economy in the earlier stages of this recovery, as incredible as it might seem, they have now become too optimistic. The past sixteen months has been a case study in "good news, bad news." For example, just about everyone here is aware of the fact that our unemployment rate has dropped precipitously of late. And, this occurred while our labor force was rising. We thus ended a prolonged period where improvements in our unemployment rate were brought about largely by a declining labor force. What could be bad about that? The bad news is that the dramatic employment gains that made this possible did not result from expansion by Rhode Island firms. Instead, it was the improving economies of our neighboring states that induced formerly "discouraged" Rhode Islander workers to re-enter the labor force and to secure employment in those states. As evidence of this, for all of 1996, payroll employment in Rhode Island grew by a scant 0.4 percent, about one-fifth the national rate! The good news (for this bad news) is that the gap between in-state and out-of-state employment gains has narrowed considerably of late.

There is more good news associated with the bad news concerning our recent reliance on other states: the Rhode Islanders who have secured employment in Massachusetts and Connecticut bring their income back to Rhode Island with them. As a result, retail sales grew faster in Rhode Island than in the nation and, we set yet another record for existing home sales in 1996.

This brings me back to the recent consensus on housing here. Existing home sales have done very well of late, as 1996 was not the only record that we have broken. We set a record in 1994 as well. What is the bad news for this? Unfortunately, the housing market does not consist entirely of the sales of existing homes. There is another dimension, one we have apparently forgotten about - new home construction. It is the behavior of this economic indicator that has been so problematic.

In January of this year single-unit-housing permits, our measure of new home construction, rose by an astonishing 61 percent from their level a year earlier. In February, the annual improvement was 30 percent. It was just about then that the new consensus about housing emerged: with a new record for existing home sales and such incredible growth in new home construction, the housing market must have returned. But, the cause of this spectacular growth was little more than the comparison of new home construction in 1996, the worst winter on record, with what was likely to be the mildest winter we will see for some time, 1997. Thus, weather distortion was largely responsible for housing's "new found strength." What has happened since February? The good news is that for March, 1997, permits were still 10 percent higher than their level the previous March. The bad news is that permits for April, 1997 were slightly below their level in April of 1996. May declined as well. Back to reality!

As a historical note, single-unit permits reached an annual rate of 5,625 at their height in the 1980s (in June, 1987). Want to guess what their levels during this recovery? Their maximum value in the present recovery was 3,300, in February of 1993. Their recovery average through April of this year has been 2,270. Not quite what you thought, is it?

The absence of new home construction throughout this entire recovery along with the favorable "multipliers" it entails has been one of the true anomalies of this period. I doubt Rhode Island has ever had a recovery without both manufacturing and housing leading the way - until now. So, as much as I dislike dampening the enthusiasm Rhode Islanders have about their economy, much of the recent strength in housing is the result of forces beyond our control: a milder-than average winter and more rapid growth in both Massachusetts and Connecticut. Until Rhode Island's own rate of job creation improves, and, along with it, the demographics of its population, it is unlikely that any sustainable strength in housing will emerge.

by Leonard Lardaro