Economic Theory Translates To ‘Real World’ in Arkansas (Market Forecast by Jeff Collins)

Whenever I tell someone I’m an economist, most begin to recant how much they hated taking economics as undergraduates. A few seconds into their rant, they realize that they are talking to an economist and try to recover. The backpedaling usually starts with, “It was a really good class, though, and I guess my brain just doesn’t work that way,” or “I’m just not a ‘math’ person.”

What I heard most when I taught undergraduates was, “How is this going to help me in the ‘real’ world?” This was usually said in a derisive tone with underlying subtext. To both current and former students of the discipline I offer the following on how understanding economics can help you in the real world.

Example 1: At the very least, understanding economics can keep you from saying dumb things in public such as: “despite high oil and gasoline prices, sales of new cars rebounded according to recent statistics.” This statement was made by a radio newscaster during morning drive-time. Frankly, “despite” is not the word I would have chosen. “Because” or “on account of” would have been better choices.

Had this person taken economics courses and paid attention, they would know if gas prices go up rapidly in the short-run, people change their driving habits but they don’t go out and change the car they drive. However, if gas prices go up and stay up for a relatively long period of time, then people will sell the gas-guzzling SUV and buy a Prius, even if they think it’s an ugly car. This is especially true if they believe that gas prices are going to hold for the foreseeable future.

Example 2: I read recently on the editorial page of one of the local papers that the current real estate market could not have been predicted back in 2004 or 2005. If you examined the data on job creation or estimates of population growth, this was an easy conclusion to reach. However, if you simultaneously examined the growth in supply of residential lots, the price of the new homes being constructed and finally, the distribution of wages of people moving into the area, it was obvious the seeds of the current market situation were being sown.

I remember telling developers and press that there was a growing disparity between supply and demand even in 2004 and that the inevitable effect of the worsening relationship between supply and demand had to be a correction. Specifically, my colleagues and I stated that price would eventually have to adjust to clear the market. When I or other market researchers said this, most of the audience looked at us as if we had two heads.

I suspect that many developers saw what we did in the data. However, despite the statistical evidence, each thought that their projects would succeed while someone else bore the costs of excess supply. Two conclusions from this experience come to mind. First, it is called the law of supply and demand for a reason. Second, even good businesses suffer in a down market.

My final example of how understanding economics benefits you in the real world has to do with anticipating the future. First, declining real estate values will provide opportunities for new entrants into the market. Projects that didn’t get done before will become financially viable. This means that once we begin to see job creation pick up, look for new developments that progress while existing developments that may be half done or even complete languish.

Next, the soft economy and declining values for real estate are going to significantly affect local government and public schools that are dependent on economic activity and real estate values for revenue generation. I would suggest keeping close tabs on retail sales for indication of how much local consumers are pulling back. With regard to real estate, one of the primary difficulties facing the market is the inability of buyers and sellers to agree on price. Foreclosures and the ANB Financial situation will continue to depress buyers’ perceptions of value affecting the price of real estate transactions and subsequently appraised values.

Finally, high energy prices coupled with the soft national economy are going to affect business travel. This will affect local restaurants, hotels, and the Northwest Arkansas Regional Airport.

(Jeff Collins, Ph.D., is an economist and partner in Fayetteville’s Streetsmart Data Inc. The company produces a quarterly report on all aspects of real estate in Northwest Arkansas. More information may be obtained by calling 479-872-1000.)