Uncharted Territory

While they may disagree on the outcome, these groups find common ground about three factors likely to shape the housing industry's future:

Most analysts contacted for this article would agree with that not-exactly-rousing assessment, especially if unemployment stays below 5 percent nationally. “There's no recession on the horizon, and the economy should do well for at least the next five years,” says Vitner. Celia Chen, director of housing economics for Moody's Economy.com, expects a “controlled” housing correction, partly because “conditions are better balanced now then they were before. Economic growth will remain steady; that didn't happen in the late '80s [or] the '90s.”

But considering that one-fifth of the country's GDP derives from home-related industries, according to Freddie Mac estimates, one can only wonder what the ripple effect might be if the housing downturn worsens and builders and developers downsize aggressively. John Burns, an Irvine, Calif.–based real estate consultant, calculates that a 20 percent decline in construction- and finance-sector jobs would mean only a 1 percent total loss of jobs nationwide because “other sectors would offset this.” But markets with heavier concentrations of construction, real estate, and finance jobs could get rocked. “What's the economy going to look like six to 12 months from now,” asks analyst Murray, “if [builders] are laying off 1,500 employees at a time because demand has slowed?”

The Fed decided in early August that another interest rate hike wasn't needed to stem inflation, and Chairman Ben Bernanke even suggested that a cooling off of the housing market might slow the economy and allow inflation to moderate. Nevertheless, David Lereah, chief economist for NAR, says higher interest rates have already tamped sales in more-expensive housing markets. And in June, NAR released a survey of American households that, by a 2-to-1 margin, identified high monthly mortgage payments as the chief obstacle to homeownership.

Where interest rates land is a major concern for those buyers who purchased a house using mortgage instruments that required little financial commitment up front. Christopher Cagan, director of research and analytics for First American Real Estate Solutions, says “creative financing” may have delayed the housing downturn, but it's yielding again to conventional fixed-rate mortgages. An avalanche of mortgage resets is about to be unleashed over the next few years: $400 billion worth this year, and $1 trillion in 2007, according to Loan Performance. In the worst-case scenario, these resets lead to “payment shock” and higher delinquencies; at the least, they encourage a segment of buyers to move down to less-expensive homes.

Most industry watchers expect the rate of price appreciation to recede, but few predict outright price declines. In California, affordability might be at an “all-time low,” according to Layne Marceau, chairman of the California Building Industry Association. But Ryan Ratcliff, an economist with UCLA, told the Los Angeles Times in June that, absent a recession, “the price of a home five years from now is not likely to be substantially lower than it is today.”

As builders have gravitated to bigger, pricier homes, they've all but pushed first-time and even move-up buyers away—just as they need new customers. Castleman of American Metro/Study notes that two years ago, 60 percent of the homes being sold in Las Vegas were priced under $200,000. “[T]hat doesn't exist there today,” he says. “Builders have been pushing so much product beyond traditional price points, but you can't move up 100 percent of entry-level buyers.” Many of those buyers are canceling orders or sitting on the sidelines waiting for better deals.

As a result, denial is giving way to damage control. Many builders are already rushing to add more-affordable attached products to their offerings. Others, like Park Square, are taking a more skeptical look at some of the land they control and are exiting deals and even partially completed developments that no longer make economic sense. In August, Centex Corp. cited a slowdown in the housing market as the reason why it rescinded its offer to pay the town of Warrenton, Va., $22 million in exchange for approval of a 300-home age-restricted community. Several builders say they are using this break in demand to re-establish their relationships with trade partners. Others are sharpening the skills of their salespeople to win over suddenly reluctant buyers. And with eyes focused on the bottom line, rounds of personnel reductions, divisional consolidations, and managerial reshufflings have begun—and they're not over yet.

“Builders are finally realizing that this slowdown is going to be with us for a while,” says Vitner.

DURING THE SUMMERS OF 2004 AND 2005, hurricane stories dominated the news in Port St. Lucie, Fla. This year, a different type of storm has grabbed the headlines. The speculators that helped make the market one of the hottest in the nation have vanished, leaving in their wake sharply higher inventories of homes for sale and builders forced to quickly shift strategies.