Is Reliance on Real Estate a Crack in the Foundation?

"There will be losses in housing-related sectors, but I think other sectors will take up the slack," said Eugenio J. Aleman, a senior economist with Wells Fargo & Co.

Even if he's right, a housing slowdown could have ripple effects down to the corner paint store. Monarch Paint and Wallcovering Co., with three stores in the District, has benefited more than most from the long boom in housing, with double-digit-percentage sales increases in 2003 and 2004, said President Victor K. Krause. Those good times led the company to increase its staff 10 percent and spend about $75,000 a year on new computer systems, paint-mixing machines and other capital expenditures.

Sales growth has slowed in recent months, Krause said, which he figures is due to fewer people buying new houses and apartments they wish to have painted. If the pattern continues and sales growth slows further or stops, he plans to hold off on any new capital expenditures or hiring. "You reinvest those extra dollars that come in," Krause said, "but you don't do that if the dollars aren't there."

Real estate helped pick up the job-market slack that resulted when the high-tech bubble burst five years ago, saving the region from the severe economic slowdown some predicted. Marla Selko, for example, worked in sales for a company that provided online education services until investors in her old employer pulled its funding during the tech collapse. Looking for work in 2002, she decided to start a business that refers people to home remodeling and other contractors, called Urban Referrals, which has been fueled in part by the strong housing market.

The question is whether another engine will come in and replace housing. The Washington area is better positioned than much of the nation in that regard. Nationally, real-estate-related industries accounted for 74 percent of new jobs over the past five years. Locally, they account for only 21 percent, because in the Washington area other sectors have grown faster.

At the end of 2005, 11 percent of Washington area jobs were held by real estate brokers, construction workers, mortgage brokers or otherwise tied to real estate, according to an analysis of Labor Department data by Moody's Economy.com. That's the highest level in the 35 years the data go back.

Indeed, there were more than 12,000 members of the Northern Virginia Association of Realtors at the end of last year, twice as many as in 2001. "If the volume of business declines just a little bit, there won't be enough business to support that many people," said Dave Hawkins, managing broker of McEnearney Associates Inc. in Alexandria, who expects those numbers to eventually drop.

There are other ways housing has influenced the economy that could leave the region vulnerable.

Economists call one the wealth effect. It's the degree to which rising prices of homes (or, in the late 1990s, stocks) lead to people spending more than they would otherwise. It's notoriously hard to measure, and economists can only guess at its exact scope, but it works through different ways. For one, when people see their house appreciating sharply, some feel less need to save as much as they would otherwise, resulting in more money to spend on everything else. For another, rising home prices and low interest rates have led many Americans to refinance their mortgages or take out home equity loans, giving them more money to spend.

Economy.com figures that mortgage refinancing put money in Washington area residents' pockets equivalent to 14.5 percent of personal disposable income. That's the 14th-highest rate among major metropolitan areas, behind mostly cities in California and Florida.

"Those economies where housing has gone skyward are most vulnerable as housing comes back down to earth," said Mark Zandi, the consulting firm's chief economist.

Despite the risks ahead, some businesses that have benefited from the housing boom say they are confident that they will keep growing even as housing slows.

Case Design/Remodeling Inc., in Bethesda, has doubled to 300 employees since 2001, fueled in part by homeowners' confidence in investing in their homes and cheap money available through mortgage refinancing and home equity loans.

President Mark Richardson said he is confident that business will keep growing strongly even with the housing slump, as people hire his company to make improvements to their current homes rather than buying a new place.

So what happened in 1989, the last time the housing market entered a slump? "Oh, that was painful," said Richardson, who had to cut his staff as sales of remodeling services declined. "The market dropped off so dramatically and so quickly. People became very gun-shy. But then during that era, you had home appreciations that were double-digit in the 1980s, and all of a sudden, it went into negative territory. It made people say 'time out' and not want to do anything."

Staff writer Sandra Fleishman contributed to this report.