UT Report: Housing Decline Still Major Effect on State, National Economies

KNOXVILLE — Economic growth in Tennessee has slowed in 2007 while remaining somewhat resilient despite the falling housing market. The good news is the state’s economy is expected to pick up by this time next year.

Those are among the findings and projections in a report released today by the University of Tennessee’s Center for Business and Economic Research (CBER). This report serves as an update to the annual economic report CBER prepares for Gov. Phil Bredesen.

The report, prepared by CBER associate director Matt Murray, analyzes economic factors in the U.S. and Tennessee and provides forecasts through 2009. A section in the report discusses in detail the situation in the subprime mortgage market. Subprime mortgages are mainly approved for households that cannot qualify for standard mortgages.

“The economy is at a critical juncture, and the risk of recession is as high as it has been for many years,” the report states. “But the economy’s fundamentals viewed through today’s lens seem sufficiently resilient to ward off an economic downturn.”

In Tennessee, job and income growth has slowed, and the state unemployment rate rose to 4.7 percent in September. The state housing market has weakened as evidenced by the lower numbers of building permits in the state’s major cities. But there is some good news for the future.

“By the end of 2008, the economy should gain steam, bolstering job growth and income growth to stronger levels,” Murray wrote in the report.

The falling housing market and lagging residential construction industry have been major themes in the economy during the past two years and will remain primary concerns for the economy in the near future.

“Fortunately, the economy has remained reasonably resilient despite the housing market contraction. Consumers have not retrenched, business-fixed investment in structures has been strong, federal government spending on the war in Iraq remains robust and the falling dollar has helped support stronger export markets,” according to the report.

Improvement Expected for U.S.

Nationally, sales of new homes have lagged, and housing starts in August were down nearly 20 percent from the same period in 2006.

“It is hard to find a bright spot in today’s housing market,” Murray said.

He predicts economic conditions in the U.S. will continue to weaken in early 2008, but there should be growth when the housing market begins to turn around near the end of 2008.

Energy prices also have seen very little relief. Oil prices broke the $90-mark a barrel for the first time in history, and natural gas prices have risen.

The dollar continues to fall in international currency markets. But while prices for imported products have risen, the dollar’s lower value strengthens U.S. exports and decreases the trade deficit.

Tennessee Follows Nation

Job growth has been slipping in the state since the first quarter of 2006 with manufacturing job losses exceeding 2 percent in each quarter since the third quarter of 2006.

In Tennessee’s housing market, Morristown and Cleveland have shown the smallest declines in building permits. Chattanooga and Clarksville have seen the largest declines.

Labor force growth has slowed in recent quarters. Nonfarm jobs growth for the first three quarters of this year totaled less than 1 percent. The construction sector has sustained growth despite the market lows. Wage and salary growth also has slowed.

The report predicts nonfarm job growth will pick up next year. Jobs in professional and business services, education, health, leisure and hospitality will grow in 2008.

The unemployment rate is expected to rise. The average annual rate in Tennessee is predicted to be 4.9 percent in 2008, just below the national average of 5 percent.

Subprime Mortgage Problems

The subprime mortgage market is a small niche in the overall U.S. financial markets but has made national headlines lately with its ripple effects on the economy.

Subprime mortgages carry higher interest rates and fees. Initial monthly payments are low, but after the introductory period is over, rates often increase substantially.

There was a rapid increase in subprime mortgages when interest rates declined to historical lows in 2003. The favorable conditions drew more home buyers and lenders. In 2005, interest rates rose and home prices began to stagnate. Homeowners were hit hard, and there has been little relief since.

The report predicts delinquencies and foreclosures are likely to get worse before they get better.

In Tennessee, subprime mortgages make up a large portion of overall mortgages. Memphis has the highest share at 24 percent.

The problems related to subprime lending and the housing market in general affect other areas in the economy, ultimately including the gross domestic product.

“If banks continue to tighten lending standards, fewer and fewer families will qualify for mortgages, which will suppress demand and sustain the housing slump,” according to the report. “Tighter standards for commercial and industrial loans prevent companies from investing in the physical capital and research and development projects that fuel growth.”

For more information and to see the full report, visit CBER’s Web site, http://cber.bus.utk.edu/.


Contacts:

Matt Murray, CBER, (865) 974-6084, mmurray1@utk.edu

Elizabeth Davis, UT media relations, (865) 974-5179, elizabeth.davis@tennessee.edu