Economists call housing key '07 issue

After a banner year for the economy in Utah, labor, wage rates and housing affordability loom as the big issues of 2007, Wells Fargo economists said Thursday.

"The housing outlook is certainly the key issue in the economic outlook for the economy," Gary Schlossberg, principal and senior economist for Wells Capital Management, said at Wells Fargo Bank's "Focus 2007" event at the Little America Hotel. "I think it really separates the optimists from the pessimists out there. The pessimists feel that the slump we've seen in housing over the last year will carry the economy with it in 2007."

Schlossberg's concerns weren't solely about the housing sector itself but about the "collateral damage" housing can cause: declines in construction and declines in housing prices, squeezing household wealth and forcing a pullback in spending.

And while Utah saw a great year in 2006, the state could start showing some signs of straining. Kelly K. Matthews, executive vice president and economist for Wells Fargo in Salt Lake City, voiced particular concern about the affordability of homes given current wage rates.

"Utah's average wages are some 15 percent to 18 percent below the national average, and we've been aware of that gap for a long time," Matthews said. "Having more employment opportunities than we have workers is an important part of having our wage rates go up faster than the national average. And I think that's occurring."

With a year-end unemployment rate of 2.6 percent, Matthews said demand is likely to push wage increases higher, perhaps up to 7 percent in 2007.

But will that be enough to keep homes in the area affordable?

The number of single-family housing permits issued in 2006 dipped every month from August through the end of the year, Matthews said.

"The average sales price or the pace of appreciation of homes in Utah the last two to two-and-a-half years has gone up essentially double, twice as fast as the rate of income. And that's being generous on the expectations of income," Matthews said. "So you can understand what's happened in terms of affordability. We've been helped by the low mortgage rates, but that affordability issue has been really impacted."

It's becoming harder and harder for families — even those with multiple income streams — to afford a home in the metropolitan area, Matthews said. To remedy the situation, a few things have to happen: people must have jobs, their wages must increase and, ideally, at least from a broader economic perspective, home prices must stabilize for a while.