Franchisors and Franchisees: Follow the Housing Market

by Ed Teixeira

The most credible indicator of a sustained economic recovery is residential housing activity. It is housing that will lead the way out of another recession.

The status of the current economic recovery in the U.S. is important information for franchisors and franchisees. Yet, as this is being written the Congressional Budget Office predicts dire consequences for the economy if Congress fails to address the expiration of the “Bush” tax cuts and the debt ceiling before the end of this year. However, if history has taught us anything, Congress will somehow avert damaging the recovery by resolving these open issues.  I would suggest that the current recovery although somewhat weak will continue.

As the media continues to report on economic statistics including unemployment data, interest rates and the rate of inflation there is one key measure that will sound the alarm for a healthy and sustained economic recovery, that key measure is the housing sector. In the recent past, housing has led recoveries from recessions in 1974, 1981, 1991 and 2001. There have been 12 recessions in America since the Great Depression and in the majority of these housing has played a key role in leading the way to renewed prosperity.  According to Martin Lowly in his article Is Housing Ready to Lead the U.S. Economic Recovery?  “Until houses are affordable for Middle Americans, housing market progress may come in fits and starts, but it is not likely to be sustained.” He reports that of 50 million mortgagees, 10.7 million or 21%, are estimated to have negative equity. The interesting news is that Arizona, California, Florida and Nevada -- the states that were most hurt in the real estate collapse over the past five years -- are now leading the U.S. labor market expansion. Unfortunately there is still a long hill to climb before these states return to healthy employment levels.

For those of us in the franchise industry a sustained recovery will lead to increased franchise growth and activity.

The S&P/Case-Shiller Home Price Index is considered one of the most credible indicators of residential housing activity reports. David M. Blitzer, Chairman of the Index Committee at S&P Indices has stated: “While there might be pieces of good news in this report, such as some improvement in many annual rates of return, February 2012 data confirm that, broadly-speaking, home prices continued to decline in the early months of the year. Nine MSAs -- Atlanta, Charlotte, Chicago, Cleveland, Las Vegas, New York, Portland, Seattle and Tampa – and Phoenix and Atlanta stand out this month in terms of their contrasting relative strength and weakness in the early 2012 housing market. At one end of the spectrum, we have Atlanta posting a double-digit and lowest on record, annual rate at -17.3%. Atlanta has now recorded five consecutive months of double-digit negative annual rates and seven consecutive monthly declines. On the other hand, Phoenix has posted two consecutive months of positive annual rates, with its latest being +3.3%, and five consecutive positive monthly returns.”

The National Association of Realtors reported on May 22: “That U.S. sales of previously occupied homes rose 3.4% in April from March to a seasonally adjusted rate of 4.62 million, the best in two years. However, this rate is below the 6 million that economists equate with healthy markets.”

The message is clear; if we want to truly know how robust the recovery is and where we are headed, look to the housing market. With few exceptions it’s the housing market that will lead the way out of the Great Recession.

© 2011 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at franchiseknowhow@gmail.com