The spillover effect is perhaps the main benefit of a strong housing market, and with housing recovering, its returning in spades.

By Peter Ricci

The housing market’s effect on the general economy – or, the “spillover effect,” as its called by some – is often the trump card among housing analysts when debating the merit of real estate, the fact that though a home seller may profit by selling a home he or she has owned for 15 years, so does the myriad industry professionals and manufacturing employees whose business complements the buying and selling process.

The absence of the spillover effect in the post-bubble economy was one of the main reasons that the economic downturn was so painful for so many, but thankfully, as a new report from the Wall Street Journal has highlighted, the spillover effect may be returning as the housing market recovers.

The Spillover Effect – Returning with the Housing Recovery

As the Journal reported, the number of industries that are directly impacted by the strength of the housing market is large:

• Companies involved in power tools, carpet fibers, furniture, and cement mixers are among the companies reporting stronger business in the fourth quarter, due to the housing recovery.
• Honeywell International, for instance, derives 5 percent of its sales from residential housing, and it reported that its heating and cooling systems rose 6 percent in the fourth quarter year-over-year; Dave Anderson, the company’s CFO, called the increase the “first sign of life that we have had in a while.”
• Outside of home sales, increasing housing construction has aided sectors of the economy more related to the homebuilding process. Union Pacific Corp., the railway company, posted a 7 percent jump in quarterly profit, and reported lumber shipments were up 17 percent; similarly, Oshkosh, a specialty truck maker, reported a quarterly profit increase of 20 percent, with sales of its cement mixers rising 36 percent and extended-reach forklifts rising 39 percent.

Home Improvement Spending & the Spillover Effect

Another area of real estate that will have a sizable impact on economic growth is that of home improvement. Mark Vitner, a senior economist with Wells Fargo, said that homeowners improving their properties for the market will also aid the general economy.

“The housing recovery will help lift businesses that have long been dormant,” Vitner said. “People will be fixing up homes to put them up for sale – buying new air conditioners, painting, fixing roofs. As the new home market picks up, that really feeds into [gross domestic product].”