Housing construction is not holding up its end of the economic recovery, but then little is. Normally, housing leads a recovery, but this one will be different and housing awaits the job and economic recovery.
Typically, housing grows at an accelerated rate as the economy recovers from a recession. Slumps breed low interest rates, slack labor and material markets, and pent-up demand for housing. Across all recessions since WWII except the last one, housing grew an average of 28 percent in the first year after the recession ended. In this recession, housing has grown 4.6 percent or about one-sixth of its normal strength. Put another way, during non-recessionary periods, housing accounts for about 7 percent of overall economic activity (GDP) but during the first quarter after the end of a recession housing accounts for more than twice that amount (17 percent) of growth in GDP. However in the third quarter of 2009 (the first recovery quarter), housing accounted for less than 2 percent of GDP growth.
Since the end of the Great Recession in June 2009 single-family starts have averaged fewer than 500,000 starts, which is less than one-third the demographically driven trend level of 1.5 million per year. Multifamily production scored an all-time low in October 2009 and has averaged less than 100,000 units or about one-third of historic levels.
Access to credit remains a serious problem for most builders and a significant hindrance to housing’s recovery. According to the NAHB’s AD&C quarterly survey of members, most builders have ceased shopping for credit because of its scarcity and the lack of home buyer demand. More than half of those builders that are shopping for production credit respond that availability is worse than the previous quarter and that percentage has been well above half since 2007.
Demand for new homes is down to historically low levels. May 2010 recorded the lowest monthly sales (seasonally adjusted annual rate) since data collection began in 1963 and the second lowest was recorded just a couple of months ago. Potential home buyers are concerned that they cannot sell their current homes for what they expect and first-time home buyers are concerned that they will not be able to get a mortgage. Both groups are concerned about their jobs and maintaining their current incomes. Oddly, about three-quarters of the respondents to the Michigan Survey of Consumers say home buying conditions are good, which is similar to the average from mid-1990s to early 2000s. Low mortgage rates and low house prices are the chief reasons cited.
Competition from existing-home sales, especially foreclosures and short sales, have also depressed new-home sales and hence new production. At least one-quarter of existing-home sales are due to distressed mortgages. While there are foreclosures and downward price pressures in virtually every market, the bulk of the mortgage problems remains in a relatively few locations and many markets are beginning to see some relief. While 4.6 percent of all mortgages are in foreclosure, the share in some states is much larger and accounts for a significant share of the U.S. total. Florida has 23 percent of all U.S. foreclosures because 14 percent of the mortgages in Florida are in foreclosure. Other states with high foreclosure rates and contributing to the U.S. totals are Nevada, Arizona, California, Illinois, New Jersey, and Ohio. These seven states account for more than half of all U.S. foreclosures.
The fall in housing’s contribution to the economy is also due to a fall in the construction cost of each house. Since the beginning of the decline in early 2006, the average value per single-family start has declined over 20 percent because new homes are smaller and contain lower-cost amenities and fixtures.
The economy will recover as new jobs are created and people are rehired, which will bring reluctant consumers back. Housing will contribute an additional 650,000 jobs as production increases in 2011; half the new jobs will be in construction and half in affiliated industries such as manufacturing components, selling materials, and providing services.