Regional Update (July-September 1998)

Index The State of the States Views From the Region Southeastern Manufacturing Survey Southeastern Economic Indicators

Cover Story - What Is Fueling Atlanta's Housing Growth?

Homebuilder John Wieland Assesses Housing Industry Developments

Gulf of Mexico Oil Companies Gush Over New Drilling Technology

What Is Fueling Atlanta's Housing Growth?

I n interstate medians, along major highways and at intersections throughout metro Atlanta, colorful signs advertising new housing lure the area's residents toward suburban or in-town versions of the American dream — a home of their own.

Inside the interstate highway that rings Atlanta, developers are concentrating on finding undeveloped tracts of land or replacing existing subdivisions with denser housing. Outside this perimeter — as far as 30 miles beyond it — pastures and forested tracts are giving way to new housing. In fact, the growth in housing that began during the last decade still remains strong in Atlanta's 20-county metropolitan area.

Coinciding with the growth in housing, metro Atlanta has experienced over five years of economic expansion — much longer than many analysts thought possible. The fact that Atlanta's continued strong housing market has defied predictions prompts some basic questions: Why has the market remained so successful, and how long can the strong growth last?

Housing Starts and the Economy

Generally, housing starts can be an indicator of the economic health of an area. Typically, when the economy is growing, housing starts grow, and when the economy's growth slows, housing starts slow as well — at times, it seems, only after a market is overbuilt.

According to many economists, by this point in an economic expansion housing starts should be waning. But the expected national housing downturn has not yet occurred, so economists and analysts are closely watching indicators like the single-family housing market, which has slowed somewhat recently but remains steady in many areas like Atlanta.

The strength of Atlanta's housing market can be traced to several positive factors, according to John Wieland, president of John Wieland Homes Inc., one of the Southeast's largest homebuilders, and deputy chairman of the board of directors of the Federal Reserve Bank of Atlanta. "The housing market's growth is a function of low interest rates, the booming economy and people feeling optimistic. Many of the psychological barriers to purchasing a home — in particular, the fear of losing a job — are gone."

Chart 1

Source: Regional Financial Associates

Chart 2

Note: Rankings based on 1997 permits for metropolitan statistcal areas (MSAs)
Source: Regional Financial Associates

Why Is Atlanta's Housing Market So Strong?

As job growth has occurred during the current U.S. economic expansion, housing starts have increased in number and remained relatively strong in year-over-year growth rates (see Chart 1).

Job growth in the Atlanta area has been spurred by a combination of factors. In recent years many corporations have relocated their headquarters or expanded their operations in the area, lured by inexpensive land, a developed infrastructure and transportation system and the low cost of doing business in Atlanta. These new companies have helped diversify Atlanta's economy, making it less susceptible to a downturn within a specific industry than some other southeastern cities such as Orlando, Fla., or Huntsville, Ala.

Because of the city's diverse and successful economy, many analysts see a rosy future for Atlanta. In fact, a November 1997 forecast by Standard and Poor's DRI projected that the city will continue to grow because of its ability to attract high-skilled workers, competitive business costs and clusters of high-technology industries. DRI's forecast also indicated that employment in Atlanta should continue to rise at an annual rate of 2.25 percent until 2002.

Another factor working in Atlanta's favor is a lack of nearby natural barriers like those that could eventually limit the range or direction of expansion in some other fast-growing cities — Chicago, for instance, has Lake Michigan, Phoenix has the Tonto National Forest, Las Vegas has Lake Mead and the Toiyabe National Forest. Conceivably, the Atlanta area's housing market can continue growing and expanding into fringe areas with cheaper land for some time, provided that housing demand still exists.

Atlanta's Housing Market Expands

New housing permit growth has been strong and steady in Atlanta since 1991. This growth has been driven by Atlanta's successful economy.

In the early 1980s, Atlanta began an economic expansion that was capped by a final burst of employment growth and housing permit growth in late 1986. Following this spurt, housing permits dropped from nearly 35,900 in 1986 to 21,900 in 1990, business activity growth slowed in 1987 and employment declined in 1991. The housing cycle Atlanta experienced in the 1980s was mirrored in other cities (see Chart 2).

Atlanta's housing permit totals in the 1990s have not been matched by any other fast-growing city in the nation. And in terms of year-over-year growth rates, only Phoenix, with a 13.7 percent average growth rate and Dallas at 10.2 percent, surpass Atlanta's impressive 7.2 percent rate for the 1990-97 period.

In the number of housing starts, Atlanta also outdistances the major cities in the Sixth Federal Reserve District states of Alabama, Florida, Georgia, Louisiana, Mississippi and Tennessee. According to Regional Financial Associates data, Atlanta's single-family housing starts grew by approximately 6.7 percent in 1996 and 2.5 percent in 1997. In comparison, Birmingham and New Orleans single-family housing starts dropped in 1997 after growing in 1996. Of the major cities within the district, only Orlando's and Nashville's single-family housing starts increased at a faster percentage than Atlanta's for both 1996 and 1997. On average, however, Atlanta has outpaced both Orlando and Nashville in housing growth throughout most of the 1990s.

Additionally, even though Atlanta has a smaller population than Tennessee, Alabama and Louisiana, the city outpaces each of these entire states in the sheer number of single-family housing starts (see Chart 3). While Atlanta's single-family housing market is remarkable, there are some factors that could affect it in the long run.

Chart 3

Source: Regional Financial Associates and Bureau of Census

Growing Pains

In recent months, Atlanta has seen a flurry of media coverage focusing on the metro area's rapid growth and pointing to potential problems, most of which are related to a phenomenon known as "urban sprawl." A May 1998 article in the Atlanta Journal-Constitution noted that real estate investment trusts based in Atlanta were being down-graded by Wall Street because of the area's growth-related problems, which at some point could also dampen the market's single-family housing expansion.

Congestion on the Atlanta interstates and highways has led to an air quality problem, and failure to comply with the federal Clean Air Act has resulted in the metro Atlanta area losing federal highway funds. This loss of federal funds makes building more roads to relieve traffic congestion expensive but not impossible. Roads are still being planned, built and funded by local tax dollars.

Congestion on the interstate highways and streets has already led some companies to reconsider expanding in certain areas of the city. Some companies have moved ahead with plans to locate their headquarters, offices and manufacturing facilities outside the city's perimeter. But at some point the northern arc of Atlanta's perimeter may reach its growth limit. In fact, a large computer company with a significant number of employees in the metro area recently said that it is reconsidering plans to add 1,000 employees and construct a new building near the northern perimeter because of problems with traffic congestion in that area.

Some northern metro Atlanta counties have reacted to the development surge by voting for candidates who advocate slowing development. Cherokee County, the metro area's second fastest growing county in 1997, is one of these. Since its elections in August the county's planning and zoning office reports an increase of about 10 percent in permit filings, and it expects more, as developers attempt to have land rezoned for projects before the new county commission takes office in January.

Balancing growth and quality of life has always been a delicate act. The Atlanta area has long sought to address the concerns of developers and citizens, and the Atlanta Regional Commission was formed in 1971 to help coordinate regional planning and intergovernmental coordination in the metro area. More recently, the Metro Atlanta Chamber of Commerce formed the Metro Atlanta Transportation Initiative, a committee of community leaders, business executives and government officials, to study the area's congestion problems and present findings to Georgia's governor and legislative leaders this fall.

In August the Atlanta Regional Commission released its annual population report, which projects slower but continued growth for all of Atlanta, particularly the northern arc along the area's perimeter highway. The commission estimates that two-thirds of the nearly 1.4 million residents who move to the metro area by 2020 will settle in the northern suburbs. Some of the counties in the northern arc have been among the country's fastest-growing. In the metro region's central county, Fulton, the Greater North Fulton Chamber of Commerce projects that its area's population will reach 221,700 by 2002, compared with 1997's population of 180,400.

In summary, developers and homebuilders could well continue to have significant long-term growth opportunities in the metro Atlanta area.

Atlanta's Future

Forecasting whether or not Atlanta's employment and housing growth will continue has never been easy. Some of the analysts forecasting a slowdown in Atlanta's expansion due to problems with sprawl have been making the same argument for several years — while Atlanta's phenomenal growth has increased.

In the future, Atlanta's single-family housing growth could be affected by a number of factors, from changes in the area's or nation's economy to a waning demand for housing. Wieland offered this insight: "At some point one of a few things will happen: either the market will become satiated and everyone who wants to own a home will own one, interest rates will rise and the potential market of home buyers will shrink, or housing prices will continue to rise because of land costs and fewer people will be able to afford homes."

Whatever happens, Atlanta's single-family housing market has clearly benefited from the area's strong economy and job growth during the current expansion. Looking forward, the Atlanta area must continue to work through issues, such as urban sprawl, traffic congestion and air pollution, that could not only derail its housing growth but also impact its economic growth prospects for the future.