Editor's Note: This is the second in The Daily News' three-part series "Housing Hurdles," an examination of the slumping real estate market and what it means for Realtors, builders and homeowners.

The nation's sinking housing market has created a ripple effect, threatening to erode the economy's near and distant shores.

At the same time, a decline in home sales is negatively affecting Realtors, who end up with fewer clients, fewer closings and fewer commissions.

But the damage goes much further. Home builders are pulling fewer permits, which means they aren't hiring as many subcontractors, who in turn aren't hiring as many laborers for the carpentry or electrical or plumbing jobs needed during home construction.

And fewer mortgage filings might mean banks and other lending institutions don't need as many loan officers to process paperwork.

It all sounds potentially devastating.

Fortunately for Memphis, that ripple hasn't packed the same punch it has elsewhere. But it's still important to wonder just how much the soft housing market has affected the local economy.

Numbers don't lie

First, consider the numbers: Residential building permits in Shelby County fell 56.9 percent for second quarter (April through June) 2007 compared to the same period last year, and mortgage filings are off 16.6 percent, according to the latest data from real estate information company Chandler Reports, www.chandlerreports.com.

So something's going on.

"Obviously, the fewer houses you build, the fewer people are going to work," said Steve Hodgkins, president of Oaktree Homes LLC. "But unemployment numbers are still good, so I would assume most of those people are able to find work in other sectors."

The Memphis Metropolitan Statistical Area (MSA) unemployment rate for June 2007 was 5 percent, up from 4.7 percent in May. The city's rate is 0.9 percent higher than the state average of 4.1 percent and 0.2 percent higher than the national average of 4.5 percent, according to the U.S. and Tennessee departments of labor.

But the levels are significantly lower than last year, when housing sales set all kinds of records, so unemployment figures mute the impact.

Dr. John Gnuschke, director of the Sparks Bureau of Business and Economic Research/Center for Manpower Studies and professor of economics at the University of Memphis, noted that homebuilding has been a "powerful stimulus" for the local economy of late.

But, he added, the recent slowdown hasn't had the same ramifications as it has in more volatile markets on the East and West coasts.

"While local trends have mirrored national trends for the real estate industry, the extreme distortions that existed in coastal, other urban and vacation destinations were not visible locally," he said. "Certainly, a downturn in any sector that generated local employment and income opportunities for Memphians will have a negative impact on the local economy. But, the downturns have not been a disaster."

Attrition and its benefits

Gnuschke added that whatever employment reductions that have occurred in housing and related fields should "return those industries to more sustainable growth paths."

That's the assessment offered by Terry Dan, principal of the longtime building company Terry & Terry Inc.

"When activity slows down, it does have an impact on subcontractors and suppliers, it's just natural," Dan said. "But sometimes that's a good thing. They'll tighten down their own operations and work a little harder and a little longer, even for a little less money.

"It's not always a bad thing for things to stabilize a little bit."

Still, large builders like Chamberlain and McCreery Inc. have responded to the sagging market by letting their employment numbers shrink over the past year through attrition.

"As people would leave, we wouldn't replace them," said company president Phil Chamberlain.

Chamberlain said builders have seen the housing slowdown coming for the past year and making adjustments as necessary. That's why they've been pulling fewer permits and scaling back on their production.

Chamberlain also said that balance should be restored once builders shed excess inventory, thereby creating demand. Part of that means offering incentives - such as paying closing costs or giving away cruise packages - to drum up interest in all the speculative homes that are sitting empty. Speculative houses are those built without being sold in advance.

As inventory dwindles, Chamberlain expects those incentives to disappear and the market eventually to rebound. In fact, he already has seen a rise in traffic at his company's homes around the area.

"Has that converted into sales for us? No, it has not," he said. "But I think we're seeing the traffic come back out and look at the market again."

Shot in the ARM

The biggest hurdle facing the housing industry remains the subprime lending fallout, which has seen foreclosures skyrocket and numerous potential homeowners fail to qualify for home loans because of tightening guidelines.

Because of the mortgage lending industry's need to assuage the foreclosure damage, fewer people are qualifying for homes - so the drop in sales and employment will remain skewed.

What's known is that changes in subprime lending have resulted in the closing of 105 mortgage lending companies nationwide since late 2006, according to The Mortgage Lender Implode-O-Meter (ml-implode.com), a Web site run by Las Vegas-based Krowne Concepts Inc. that tracks the industry.

Michael Wiegert, vice president of Wachovia Mortgage Corp. and president of the Memphis Mortgage Bankers Association (MMBA), attributed any kind of job depletion in the industry to those changes, adding that the job drop-off has not reached catastrophic levels - and especially not here.

"I don't think that the current housing environment has had a negative impact on the hiring of experienced, reputable sales people within the mortgage industry," Wiegert said. "Most MMBA member banks and mortgage companies that I have spoken to are continually looking to hire good mortgage consultants/loan originators."

Coping mechanisms

As other industries cope with the changing landscape of housing, they find ways to adapt. Chamberlain noted that construction workers who aren't building homes have found jobs on the commercial side.

"Commercial construction has been strong, and it's helped suppliers and subcontractors maintain some volume," he said.

Hodgkins agreed that the construction industry has a way of working itself out.

"I hire an electrician, and he's going to have 10 guys working for him and four or five of them are going to be apprentices and real young, and those guys can go off and do something else," he said.

Ronnie Green, business representative for the International Brotherhood of Electrical Workers Local Union 474, agreed. He said most of the union's electricians work on industrial and commercial projects and have not been affected by the residential slowdown.

"It has not had any effect on us," Green said. "It hasn't affected the local union's economy."

Stunted ambitions

Sometimes people criticize Memphis, saying it never will be Atlanta. In this current housing slump, maybe that's not such a bad thing.

As Dan pointed out, cities such as Atlanta, Dallas and Phoenix feel the effects of a slow housing market more sharply because they're starting 10 times as many homes.

"Those markets have suffered more, obviously, than Memphis and Shelby County because our numbers, even in good times, are small in comparison to those places," he said.

The same can be said for the bad times. So, as those in the real estate business - homebuilders in particular - weather the current storm of consumer confidence and subprime lending woes, they shouldn't suffer huge losses.

"We don't experience the ups or the downs that you read about in the national news or hear about on 'The Today Show,'" Chamberlain said. "We don't experience those highs and we don't experience those lows. We maintain a relatively steady market. I wouldn't say we're in a strong market now, but I would say we're turning back toward a strong market."