By Matthew Power When the great steel and concrete shoulders of the U.S. economy tumbled on Sept. 11th, Americans felt what the citizens of ancient Rhodes must have felt in 226 BC, when their mighty Colossus suddenly snapped at the knees. In the span of a few minutes, the long shadow of American capitalism had been knocked flat, reduced to a noxious cloud of pulverized concrete and gypsum, laced with asbestos, mercury, and lead.

But as the dust has settled, the economy also has come to rest, not at ground zero, as some feared, but upon a sturdy canopy of asphalt shingles, engineered lumber, 2x4s, and brick veneer. For the short term, at least, housing saved the day.

But can it last?

"We're all uncertain," confides Stanley Duobinis, director of forecasting with the NAHB. "Nobody has all the answers."

Fear. Contingencies. Hope. Whatever the prediction, few will contest the critical role housing has played in this unfolding crisis. Here's our latest update on the situation.

Think happy thoughts

Few in the home building industry want to play Judas and talk trash about the economy. They remember the scars, the 30 percent decline in new starts that wiped out so many small builders a decade ago.

Fortunately, the housing industry infrastructure has a lot more backbone than it did back in 1990. Many builders entered the fourth quarter of 2001 with a six-month backlog. And that demand remains relatively unshaken for the time being.

"The impact [of the World Trade Center (WTC) attacks] on our company has been minimal," says Richard Hawkes, with Holiday Builders in Melbourne, Fla. "Our monthly sales for September have been very strong, finishing the month 30 percent over last year. In fact, September has been one of our best months this year."

The same is true of modular housing. Mick Barker, president of national modular home builder Genesis Homes in Auburn Hills, Mich., said in mid-October that the month might show record-setting sales. "The low interest rates have really had a positive impact," he explains. "We're not anticipating any major downturn."

Financial forecasts from the NAHB share the same level of optimism. It should be noted, however, that its predictions rest upon a fragile condition. "We make the assumption that there will be no further major terrorist attacks in this country," says Duobinis. "If that happens, then we could have serious problems."

That risk, of course, dangles over every prediction like the sword of Damocles. How real is the threat? Numerous exposures to anthrax have raised anxiety levels.

One close call in New York brought NBC news icon Tom Brokaw to tears of outrage on national television. The CIA warned members of Congress in early October of a "100 percent chance" of more terrorist events.

Nonetheless, housing rolls on. A week after the WTC attack, the NAHB conducted a small survey of about 30 members, including six high production builders. The results: Traffic in models had dropped off from 10 percent to 20 percent, yet sales held steady. Most builders felt they would need at least four weeks to detect any quantum shift in home buyer psychology and did not expect to make any major changes in fourth-quarter plans. But many expressed immediate concern about spec house building--and ceased all spec building until further notice.

At about the same time, NAHB chief economist David Seiders issued his first forecast on the impact of the bombing on housing. His prognosis: The already slumping housing market would be down 13 percent from previous estimates in the last quarter. Those numbers appear to have been relatively accurate. On the other hand, he expected housing to recover quickly, with a full, robust market ticking along by 2003, closing more than 1.6 million units.

Historic guesswork

To the surprise of many economists, when U.S. military attacked Afghanistan, the stock market responded with relative calm. But to hear two economists at UCLA tell it, we should have expected nothing less.

According to Edward E. Leamer and Christopher Thornberg, similar events, such as natural disasters and war declarations, have not driven the American economy into recession. They further contend that trying to predict a recession using consumer confidence as a model inevitably fails. Freaked out consumers don't cause recessions. Rather, impersonal market forces do the dirty work, such as price spikes in the oil markets or exuberant investment in volatile technologies. (They cite the recent Internet fiasco as a force behind the current downshift.)

As examples, the economists refer to Hurricane Andrew and Hurricane Floyd. In the states impacted, full economic recovery took only one quarter following the disaster.

The economists may have hit upon a deeper truth. Consumer confidence with regard to non-essential durable goods may dip sharply without a severe impact on their intention to break ground on a new house. Many have been waiting a long time.

Consider the case of Chris Williams, owner of Town and Country Development, in Bloomington, Ill., a place far from ground zero. On Sept. 11th, Williams had to talk two 20-something clients out of trying to close the deal on their $350,000 home.

"My son had called me from church," Williams explains. "He said, 'Dad, you really need to be here.' ... I was amazed that the owners wanted to proceed, but felt it was a 'nothing to celebrate' kind of day. Some local gas stations jacked up gas prices to $5 a gallon. That sort of thing was going on. Well, I finally got [the buyers] to agree to postpone."

"It's now a few weeks later, and I already have people pushing to sign contracts again," Williams adds.

Material evidence

Although core demographics may insulate builders, other key areas of the industry have been treated less kindly by third-party analysts.

On September 24th, brokerage house Credit Suisse First Boston issued a caution. Their comments: "Channel checks with manufacturers, retailers, and distributors indicated an alarmingly pessimistic tone. That tone indicates the possibility for a rapid deceleration in fundamentals."

Credit Suisse further adds that "based on historical data related to military actions and surprise events, we believe a significant decline in consumer confidence is inevitable. In addition, rising unemployment should also continue to pressure the economy, likely resulting in a prolonged downturn. Therefore, we are lowering our estimates on all of the building product companies in our universe to be conservative. In our opinion, 2001 and 2002 consensus estimates are too high for every building product company."

Credit Suisse has good reason to talk doom and gloom. The company recently announced plans to lay off 2,000 workers. Several other brokerage houses have made similar cuts.

Outside the immediate circle of housing, other industries have taken heavy damage in recent weeks--including some that were expected to stand strong. For example, apartment companies would be expected to do well, because people continue to rent instead of buying homes, but firms like Summit Properties of Chicago downgraded its earnings estimates in mid-October in anticipation of laid-off workers not being able to pay their rents.

Collateral damage

Other indicators suggest that the impact on housing may vary wildly from one region to another. In areas already under stress, for example, the effect of the attacks has been compounded.

Take Englewood, Colo. Tom Sattler, of Sattler Homes, says that sales have slowed dramatically in his market. He compares the atmosphere to the aftermath of the Columbine shooting.

In Seattle, the three-strike combination of Boeing layoffs, the dot-bomb debacle--and now this--have caused deep wounds. Bill Hurme of Seattle-based John L. Scott Real Estate works with many area builders. "They're really feeling it," he says. "A lot of them are hurting."

Terrorism may also throw cold water on smart growth initiatives. Many large cities could become especially vulnerable to terrorist-induced fear. This trend creates troubling prospects for builders looking at infill land and projects. In the immediate aftermath of the attacks, many people reconsidered buying homes in urban areas. Writing in The Wall Street Journal at the end of September, June Fletcher comments on the flip side: "Vacation home brokers from Texas to Vermont are reporting a jump in inquiries."

The Urban Land Institute, recognizing that the fear factor could affect the future of cities, changed its fall meeting agenda to discuss how planners can address the market shift.

And The Wall Street Journal reports that recession fears have "trumped urban sprawl issues in high-growth states." Their contention: "Right now growth management is clearly moving down on states' priority lists, as the economy moves up."

Fletcher adds that declines in the value of homes may be sharp in areas such as San Francisco or San Diego, while values in Washington, an area that "usually does well during a war," may actually increase.

Shaken faith?

An update of the NAHB economic forecast issued on October 5th suggests a slightly lower confidence in the power of low interest rates to halt the slide in short order.

"Preliminary results of a large mail survey conducted at the end of September show some weakening of home buyer demand, as well as greater caution on the part of builders," Seiders explains. "A falloff in sales was reported by about half of the builders, lower buyer traffic by nearly three-fourths, and nearly 30 percent said their cancellation rate had increased to some degree since September 11th."

Seiders says that this data generally supports the forecasts made immediately after the bombing and that "the prospects for housing and the economy in 2002 still look quite good."

The bottom line for moving forward: Proceed with caution.

John Schleimer, a marketing consultant out of Roseville, Calif., warns builders to approach land purchases carefully, for example.

"I would not be doing proformas that call for 10 percent appreciation in land values between the time you buy lots and sell the houses," he warns. "That's what many of my California clients have been doing recently, and it just won't work in today's economic climate."

Building guru Al Trellis urges builders to keep an eye on the basics--especially job growth (or loss) in their region. Builders in the Seattle area, for example, need to be very aware of what's happening at Boeing.

Nonetheless, for the time being, he urges builders to stay the course, come good news or bad. "A great product, in a great location, for a great price is going to sell regardless of whether the economy goes into recession."