Builders have been cutting starts since early 2006 in the hope that by ratcheting down, they can help the housing industry burn through record levels of unsold inventory and lead home building out of its years-long funk.
At the onset of the housing recession in 2006, builders heard industry and economic experts talk about the likelihood of a soft landing and the need for builders to pull back on construction to help the cause. About every six months since, the experts have adjusted their forecasts to tell builders to hold on another few months and sales would bounce back.
But the home building industry doesn’t exist in a vacuum, and builders alone can’t fix an ever-expanding problem that started with housing in the United States and now encompasses the global economy at large.
This fall, a new round of predictions forecast that the housing recession will hit bottom sometime in early 2009, with new-home sales and starts rebounding later in the year. Once again, these predictions may be ignoring the greater economic context.
The global financial system, particularly banks, will take years to rebound from the catastrophic losses they’ve suffered thanks to the devaluation of mortgage-backed security holdings and falling land values. And as long as worldwide investment declines curtail the amount of available credit, financing will continue to be in short supply for American home builders.
Moreover, the lack of money isn’t going to be a short-term phenomenon, says Christian Weller, a senior fellow at the Center for American Progress and a professor at the University of Massachusetts, Boston. Consumers, businesses, and banks all became overleveraged during the first part of the decade and there is no quick-fix solution for that.
“It took us seven years to build up all of this debt, so one or two bad years, where we see big foreclosures, big price drops, and sharp rises in credit card defaults, simply won’t be enough” to turn it around, Weller says.
Ever optimistic, many builders insist that once consumers regain confidence in the future direction of house prices, their pent-up demand for new homes will be unleashed, and sales will follow.
And it is true that interest rates remain near historically low levels, and the government is pumping money into banks to allow them to make mortgage loans. So banks should be able to offer mortgages to more would-be buyers than they could a few months ago, setting up conditions to restore demand for homes.
But demand has dwindled as unemployment numbers have grown and more people fear losing their jobs. Weller doesn’t see job loss slowing down, either, since global problems are driving down U.S. export growth.
The bottom line? Builders need to look beyond the horizon of their own markets and realize the financial storm clouds may not abate any time soon.