Builders, manufacturers, and others hoping for upbeat news at Wednesday’s NAHB construction forecast conference found themselves reaching for their Motrin instead.
While recent months have brought a spate of better news for the housing industry, Vitner and other economists speaking at yesterday’s day-long conference reminded builders and others that while the recession may have technically ended in June, it will be a long time before the economy feels like it has recovered.
“We have had incredible job destruction in this recession—we are on pace to lose 9 million jobs,” Vitner said, his cheerful demeanor at odds with the bleakness of his comment. “If we added in June the jobs we have lost at the same pace that we added jobs in the last recovery, we will not have added back the jobs we have lost until 2015. That’s almost a lost decade.”
Many of those who have lost jobs have been builders and subs, of course; several public builders, for example, now operate with half the workforce that they did during the boom.
That level of job losses have also had terrible effects on consumers’ interest in and ability to buy a house, despite the bargain housing prices available in this downturn. “The folks that are unemployed have been unemployed for a long time,” noted Vitner, who said roughly one-third have been unemployed for six months or longer and have likely exhausted whatever savings they might have had. “If they get a job tomorrow, they’re not going to be able to go out and make big purchases. They’ve got a heck of a hole to fill.”
Unfortunately, they probably won’t find a job tomorrow. “The problem is no one is hiring,” said Mark Zandi, chief economist for Moody’s Economy.com, who said companies currently seem especially slow to add workers to their payroll. Perhaps employers are just being cautious, but he also suggested it could result from a lack of confidence in the economy and the dearth of credit available for small businesses, which traditionally create a large number of jobs in the economy.
The problem is likely to get worse before it gets better; many economists expect the unemployment to peak at 10% or slightly higher between late 2009 and the first half of 2010.
This summer brought the first home price stabilization in months, but home values remain a volatile factor for builders and the larger economy. Some industry watchers even warn of a coming double-dip in 2010, as more and more distressed properties come on to the market. One of those is Zandi. “Prices have stabilized, but I don’t think price declines are over,” he said.
The risks to home prices in the current recovery are many.
While the federal housing tax credit has supported sales of both new and existing homes this year, many are concerned that demand—and these marginally stronger prices—will drop dramatically if that credit expires as legislated on Nov. 30.
The job market, as noted, also remains a challenge.
So do foreclosures. “The key problem [in home prices] is the foreclosure problem,” Zandi asserted. “It’s not getting any better—the crisis continues to mount.” Loan modification programs have resulted in only marginal success; Zandi said he assumes a 35% default rate on all loan modifications within three years, which he considers “optimistic.”
And with a new wave of mortgages resetting, job losses continuing, and potentially home prices declining, the number of foreclosures are expected to grow in 2009 and 2010. While that trend might level off around the fourth quarter, given that lenders are reluctant to evict homeowners during the holidays, it won’t last. “We’ll see foreclosure sales pick up in the spring and summer,” Zandi said.
As detrimental as foreclosure sales are to the new-home business, though, builders desperately need the volume of distressed properties to shrink. “There is a surfeit of housing inventory,” said Zandi, who suggested the country currently has as much as 1.8 million excess homes based on historical patterns of household formations and housing.
The past 12 months have been undeniably difficult for builders, but they’ve got at least one very big thing to be thankful for: the Federal Reserve, which has bought more than a trillion dollars of Fannie and Freddie securities and essentially become the country’s mortgage lender.
“It has been incredibly important in keeping [mortgage rates] down,” said Zandi, who estimated that mortgage rates would be at 6%, rather than 5%, if it wasn’t for the Fed’s action. Joel Prakken, chairman of Macroeconomic Advisers in St. Louis, agreed. Such low rates are a “testament to the success of the Fed’s program,” he said.
Such support won’t last forever. The Fed has said it will end that buying program in March 2010, which leads economists to project higher mortgage rates next year. That could add another hurdle to the recovery of the housing market, which will already be facing the pressures of foreclosures, job losses, and potentially the end of the federal tax credit.
The tax credit, under discussion in Congress this week, was also a hot topic at the NAHB conference. Zandi, long a housing bear, said he thought the credit should be and would be extended beyond the approaching Nov. 30 deadline.
“The housing industry is still on proverbial life support, and it would be premature to take it off life support,” he said.
Alison Rice is senior editor, online, at BUILDER magazine.
Learn more about markets featured in this article: Charlotte, NC.