Meeting our Challenges

Confronting one of the greatest challenges our industry has seen in decades, at its Fall Board Meeting in Seattle the NAHB directors resolved to pursue a prompt response on several fronts to limit the damage of the mortgage credit crunch and restore confidence in the housing market.

The enormity of the problem became apparent late in the summer. Investor concerns over the repercussions of rising defaults and foreclosures in sub-prime loans originated during the later stages of the housing boom precipitated a full-fledged panic in the financial markets, freezing up the flow of credit not only for housing but also for the economy at large. For our industry, the writing was on the wall. Following more than a year of substantial decline, further tightening of mortgage lending standards dealt a crippling blow to home builders who had been concentrating their efforts on working off unsold inventories. For the nation's economy, the implications were also unsettling. Just as housing had led the U.S. economy to higher ground earlier in the decade, it now appeared possible that housing could bring the economy down.

At year's end, while we are still waiting for our markets to stabilize and recovery to begin—which is now likely to occur in mid-2008—the good news is that we have been making steady progress in moving toward our objectives in what everyone had come to recognize would be a long, tough battle. The NAHB is the one organization in Washington that has been working closely with the key players in resolving the credit crunch. We have met with the Federal Reserve, Bush administration officials, and leaders in Congress to engineer a coordinated and effective solution. Here are some of the developments that suggest we will soon be able to extricate ourselves from today's hard times:

• The Federal Reserve has lowered interest rates, restoring confidence in the financial markets and sending a strong signal that it won't stand by and watch the economy slide into recession. Along with the continuation of relatively low mortgage interest rates, a healthy economy that is generating new jobs and income provides strong support for a resurgence in housing demand.
• Major players in the mortgage market have been recognizing their responsibility to step up to the plate and help subprime borrowers avoid losing their homes when their loans are reset at interest rates they can't afford.
• Congress has joined efforts to limit foreclosures. It has also been pursuing legislation to discourage unsound lending practices. Congress is revitalizing the FHA so that government-insured loans can once again return as a viable source of affordable financing for creditworthy families, including those who need to refinance out of loans with resetting interest rates. The credit crunch has also given impetus to efforts to reform Fannie Mae and Freddie Mac, including allowing them to purchase loans exceeding the conforming loan limit in high-cost markets.
• As “the voice of the nation's housing industry,” the NAHB has stepped up its presence in the news media, sending a loud and clear message about the steps that need to be taken to resolve the credit crunch. And, equally important, to encourage prospective home buyers not to be daunted by exaggerated media reports, we have been presenting a more balanced and accurate picture of the housing market and home buying opportunities. The “Myth Busters” section of the NAHB tool kit (www.nahb.org/toolkit) is helping state and local builders associations set the record straight on conditions in their markets.

The coming year is expected to be one of transition. The NAHB will continue to work steadfastly to resolve the credit crunch. Housing is not out of the woods yet, but the odds are improving that we will soon get a glimpse of the better times that lie ahead.

Brian C. Catalde
President, NAHB Washington, D.C.

Ups and Downs

In the wake of the mortgage credit crunch, homeownership has gone down while the supply overhang of homes has gone up.

The summer freeze in mortgage credit markets generated yet another down-leg to the stunning housing downswing that began in the latter part of 2005. Net home sales fell abruptly, and builders reacted quickly by cutting back starts of new units. The downshift in sales provoked further erosion of the U.S. homeownership rate, but the cutback in starts hardly put a dent in inventories of new homes in the hands of builders. Indeed, vacancies in the stock of new and previously occupied homes on the market actually moved up in the third quarter, and we're approaching year-end with a near-record supply overhang that's putting strong downward pressure on home prices.

The turmoil in mortgage credit markets took a heavy toll on sales of new and previously owned homes in both August and September, and sales cancellations moved up aggressively during these months as well. Builders report that the virtual shutdown of the subprime and alt-A mortgage sectors disrupted sales and closings not only in the entry-level market but also up the ladder in trade-up segments, and the freeze in the jumbo mortgage securities market severely damaged the high end of the housing market.

The U.S. homeownership rate was gravitating downward from the record high posted in 2004 as the housing downswing deepened, and the abrupt third-quarter downshift in net home sales provoked yet another downward adjustment. The homeownership rate now stands at 68.1 percent (seasonally adjusted), down from the record high of 69.3 percent in the second quarter of 2004 and the lowest level since the second quarter of 2003—just prior to the explosive and unsustainable housing boom.

The recent erosion of the homeownership rate has reflected absolute declines in the number of homeowners, an unusual occurrence that has been accompanied by sizable increases in the number of renter households in the country. But overall household formation (whether homeowners or renters) has been weak for more than a year, reflecting deteriorating economic and financial market conditions as well as outsized household formation rates during the previous housing boom.

The slowdown in household formations, combined with placement of many investor-owned homes on the market, has kept the supply of vacant housing units at near-record levels in both the for-sale and for-rent segments of U.S. housing markets.

Next year promises to be another tough year for builders. Avoid speculative building like the plague, since vacancies are very high and the timing of the sales recovery is highly uncertain. Also, be sure that presales involve buyers that are pre-approved for mortgage financing (prequalification is not enough). And do whatever it takes to sell standing inventory, including price cuts and non-price incentives—particularly those that reduce up-front cash requirements. House prices most likely will deteriorate during 2008 in many markets, and hanging on to inventory generally will turn out to be a losing proposition.

David F. Seiders
Chief Economist, NAHB Washington, D.C.

Congress and federal financial regulators need to take steps to ensure that homeownership opportunities remain for subprime borrowers, according to Sheila Bair, chairman of the Federal Deposit Insurance Corp. in an address before the 2007 Housing Affordability Symposium on Oct. 5–6. Action needs to be taken to ensure that the subprime problem “does not become a drag on the economy,” she said. “The ultimate solution is a national standard that covers all market participants.”

The House Ways and Means Committee on Nov. 1 marked up and approved the Temporary Tax Relief Act of 2007. The primary focus of the bill is to extend short-term relief from the Alternative Minimum Tax for another year. The bill would also extend a number of expiring tax provisions, such as brownfields expensing, New Market Tax Credits, and leasehold improvements. The committee also included in the bill the Mortgage Debt Forgiveness Relief Act of 2007, legislation supported by the NAHB because of its critical importance to resolving the subprime mortgage crisis.

Mark Zandi, chief economist for Moody's Economy.com, and Bernard Markstein, NAHB director of forecasting, gave similar views on how the housing market slowdown is shaking out across the country at the NAHB's Fall Construction Forecast Conference. Neither economist predicted that housing's considerable drag on growth will actually pull the national economy into recession. However, states that experienced the most significant run-ups in home sales, prices, and production during the recent boom period will definitely be feeling a major pinch—particularly in terms of home sales and prices.

The HBAs in Southern California have already begun providing aid and services to the victims of the wildfires that recently swept the region, displaced hundreds of thousands of residents, caused more than $1 billion in property damage, and destroyed more than 1,600 homes. Within days of the fires, the Building Industry Association of San Diego County posted a list of rebuilding services and related information available from its membership on its Web site, www.biasandiego.org.

With the odds growing that New York City, with a population of more than eight million and 578 miles of waterfront, could be hit by a destructive hurricane, the New York City Office of Emergency Management is sponsoring a design competition to enhance the city's ability to provide provisional housing for people who lose their homes. A jury of experts in the fields of architecture, design, urbanism, and government will choose 10 entrants who will each be awarded $10,000 along with technical support to develop their proposals into workable solutions.

Green Energy

The EnergyValue Housing Awards honor visionary builders of environmentally responsible homes.

Consumer interest in green building is clearly on the rise, with concern over energy prices and climate change as two of the driving factors. And while the definition of green building is still in the process of being determined and fully understood by the residential industry, you might be surprised to hear that many people don't naturally associate energy efficiency with green building. Some builders, however, have made the connection between the two and are using inventive methods to turn the American dream, with an environmentally sustainable twist, into reality.

A distinguished group of these energy-conscious builders will be honored for their vision on Feb. 13, 2008, with the EnergyValue Housing Awards (EVHAs) during a ceremony at the International Builders' Show in Orlando, Fla. During its 13-year history, the EVHA program has recognized builders who voluntarily integrate energy efficiency into the design, construction, and marketing of their new homes. The program has also educated builders and the public about the diverse approaches available for creating homes that are not only high performing but also attractive and sustainable.

EVHA finalists are evaluated by a panel of noted energy-efficiency experts for their energy value, design, construction methods and processes, and marketing in the categories of affordable, custom, factory-built, production, and multifamily, for hot, moderate, and cold climate regions. Each year, one finalist also earns the notable designation of Builder of the Year for the most inventive design.

The EVHA program is coordinated by the NAHB Research Center in partnership with the U.S. Department of Energy's National Renewable Energy Laboratory and the NAHB. This year, the EVHA program was honored by the Energy and Environmental Building Association and named one of the 25 most significant contributors to the promotion and development of residential building performance.

Visit www.nahbrc.org/evha to vote online for your favorite EVHA home design and to purchase EVHA ceremony tickets. For more information, contact Kevin Mo, EVHA program manager, at 301-430-6210 or kmo@nahbrc.org.