January 7, 2009
Down But Not Out, Builders Press for Stimulus to Rally U.S. Economy

In news media teleconferences around the country last week, NAHB leaders and members joined to convey the urgency of putting housing at the center of the economic stimulus plan that Congress is now rushing to put together so that it will be ready for enactment almost as soon as President Barack Obama is sworn into office on Jan. 20.

NAHB President and Chief Executive Officer Jerry Howard voiced concern over the acceleration of the housing downturn, noting that housing starts last month slumped to their slowest pace since the Commerce Department began tracking them in 1959, and that residential production actually had fallen to its lowest point since World War II.

The confidence of builders as measured by the NAHB/Wells Fargo Housing Market Index has been at a record low for two consecutive months, he said; foreclosures are at record highs, with new waves likely to hit the market in the spring and summer; consumer confidence has been shattered; “and potential home buyers are shell-shocked and standing on the sidelines.”

All of the woes that have devastated the nation’s economy can be traced back to the housing downturn, he said, and housing is the obvious vehicle for halting further erosion and leading the way back to recovery — its customary role during the business cycles that have come and gone over more than half a century.

When the economy is healthy, Howard said, housing and the ancillary industries involved in producing the 300-some components that go into a house account for roughly 15% of the gross domestic product, its single largest component.

“If you’re going to stimulate the economy,” he said, “you should start with the sector’s that’s the largest component. The housing sector has gone down, and it has dragged down the financial sector.” The troubled financial assets that galvanized this fall’s $700-billion TARP rescue package “are all mortgage-backed securities,” he said, “all tied to housing.”

While policymakers are doing the right thing by addressing the foreclosure problem, Howard said that more needs to be done to correct the housing market on the demand and supply sides in order for the industry to emerge from the dangerous downward spiral that is now ruining the rest of the economy.

The unsold inventory of homes has now reached a 12-month supply, twice as high as it should be, he said, primarily because foreclosed properties have been flooding the market and not because of the nation’s builders, who in effect have put a moratorium on production until the national oversupply is brought down to more acceptable levels.

However, Howard said that it would take only four to six months to work through the inventory if Congress revived the approach it used to rekindle home sales during the 1974-75 recession. Implementing a two-pronged solution that led the economy out of recession within one year, Congress and the Ford Administration stimulated housing demand by buying down mortgage interest rates from about 10% to 6% and creating a tax credit for home buyers.

The “Fix Housing First” campaign that is now being waged in Washington and nationwide would spur sales with a mortgage buy down to 2.9% and significant improvements to the $7,500 tax credit, which is available to first-time home buyers only through June 30 and requires repayment, with no interest, over a period of 15 years. The credit would be expanded to all taxpayers purchasing a principal residence, it would be a true tax-credit with no payback requirements and the amount would rise to a range of $12,000 to $22,000, depending on local housing costs.

More than 600 companies and organizations have now joined in support of “Fix Housing First,” he said.

Unlike the automobile industry, “we are not asking for any direct relief for any companies,” Howard said. “We just want the market to be put in order.” Home builders, he added, “know how to go about making money when the markets are stabilized.”

As a result of the stimulus, he predicted, home prices would stabilize almost overnight and fewer and fewer home owners would be drawn into foreclosure. Production would begin turning up six months down the road, putting manufacturing back on track and taking pressure off the financial markets at home and around the globe.

“Housing is the one sector that can start back up in a flash once financing dollars become available and buyers come back to the market,” Howard said. Other types of projects that have been proposed for a stimulus program — such as infrastructure and green technology — have been untested or would be slower to reengage the economy, he said.

The housing stimulus proposed by “Fix Housing First” would create 600,000 housing-related jobs in the first year, the equivalent of about 20% of the jobs that the home building industry has lost so far in the current downturn, he said.

Main Street Is Feeling the Pain

Howard stressed that the pain of the current downturn is not being felt by big businesses alone but is constraining economic activity on Main Street and in small town America.

Philip Hoffman, a third-generation custom builder just west of New Orleans, said he has seen his business plunge. “Suddenly, the phones stopped ringing in the middle of 2006,” he said, “and they haven’t started ringing since.” Since then he and his wife have closed on just six houses “and we have gone through all of our family savings in the last 22 months,” he said.

Prior to the housing bust, Hoffman’s sales were averaging 15 to 18 homes annually, with gross revenue of $5 million to $7 million. “In 2005, we had six employees, we were rocking along pretty good and we thought we were on top of the world with our small family-owned business,” he said. Today, the company has no employees. The last worker to receive a pink slip was Hoffman’s own son, who got the bad news when he returned from his honeymoon in April.

Hoffman reported that construction remains stable in the city itself, which is still recovering from the devastation left by Hurricane Katrina more than three years ago. But in suburban parishes outside of New Orleans, building permits are down as much as 75%. “Guys who have been in business for 30 to 40 years are just walking away and locking their doors,” he said.

Homes are being built in today’s market in Louisiana almost entirely on a pre-sold basis, he said, and pent-up demand for housing is growing. “People want to move into a new home,” he said, “but they can’t sell the existing home because the people coming through can’t get financing because the financing is so tight.”

Building suppliers and manufacturers have been hammered by the housing recession, as well. Patrick Abercrombie, of Lowe’s Cabinet and Lighting Gallery in Cleveland, Tenn., said that his business volume is down 31% from 2006 and 60% below the company’s three-year projection. He has reduced his staff by 43%; it has dwindled to eight employees.

The economy of the whole area — which has a population of 93,550 just east of Chattanooga and relies to a significant extent on tourism — “is really, really down,” said Abercrombie.

Abercrombie said the base of his business has shifted from single-family to multifamily housing, where he is earning a lower profit margin, “and we have had to really expand the delivery area.” The lagging market is “eating into the cash we have,” he said.

If the housing downturn continues much longer, it will overcorrect on the up side, encouraging “a ton of subpar builders to come on board to make money,” he warned. “They will get a permit pulled and build a substandard house that’s unacceptable. There aren’t enough contractors to go around at that point,” he said.

Source: National Association of Home Builders, December 22, 2008

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Brought to you by the Steel Framing Alliance (SFA) on the first Wednesday of each month, Framework Online arms you with the latest news and commentary on the steel framing and construction industries. In addition to industry headlines, trends and project profiles, Framework Online provides information and ideas that will better enable members to increase their participation in the residential and commercial construction markets.