Local Employment and the Demand for Real Estate

The Real Estate Industry’s mantra is “real estate is local”. That is supposed to calm the fears of potential buyers who are hearing about real estate woes across the country. I personally believe that the subtext of this message is supposed to be that losing money in real estate is something that happens somewhere else.

Whatever. Let’s figure out what is going on in the Chicago area because that’s what everyone here cares about. Basically it comes down to “supply…demand”. For those of you old enough to remember that was Father Guido Sarducci‘s distillation of all you needed to remember about economics so why bother taking the entire course. The man was a genius.

Taking his advice a long time ago I began to track Chicago area employment as a primary indicator of the underlying demand for real estate – let’s face it, employed people buy homes. This data is available from the Bureau of Labor Statistics on a monthly basis. I focus on what’s called the broad metropolitan area that includes Naperville and Joliet because people commute all over the place around here and you can’t separate out the impact of jobs on homes in Chicago vs. Naperville for instance.

So what does the data show?

The data shows that, although employment growth in the area has slowed down a bit, employment continues to grow. January 2008, the most recent month of data, is actually slightly higher than January 2007. The other interesting thing about the data is that area employment actually declined fairly significantly during 2000 – 2003, after the tech crash. So far, we are not seeing anything nearly as bad as that time period. And interestingly, during that period, the housing market in the area did not really suffer. So the fundamentals would seem fairly strong still.

But there’s a bit more to the story. First, where is area employment headed? In last week’s Crain’s they mentioned that “the economic research unit of New York-based Moody’s Investors Service Inc. also predicts local employers will shed 19,000 jobs in the first half of 2008.” So, although employment has been largely unaffected until now, that may all soon change and we may be at the beginning of another dip. We’ll know soon enough if this is going to be an issue.

The other issue is that, although people may be capable of buying homes and may want to buy homes, they may be holding back because they are nervous about the market or they are waiting for prices to come down more. In fact, I think this may be the primary factor holding back the Chicago real estate market right now. Activity is slow because there is a fairly significant bid/ask spread in the housing market – sellers want more than buyers are willing to pay. However, sooner or later this spread has to close because eventually people have to move – for business or personal reasons. And once that spread begins to close I think we’ll see a lot of pent up demand from the employed masses looking to be satisfied.