July 29, 2006

Sunday NY Times Cover Story: Housing Slows, Taking Big Toll on the Economy

I'm not sure how I feel about the MSM reporting what HP and the bubble blogs have been saying and predicting for months. Proud? Vindicated? Worried?

What I'd like to see them pick up and run with now is the devastating effect the housing bust is having on the biggest bubble cities, where like Phoenix 40% of the entire economy rests on homebuilding, and the individual investors and last-suckers-in who are getting slaughtered.

I'd also like to see some good reporting on the homebuilders, who haven't adjusted their books yet to reflect the decline in asset values (in violation of Sarbanes-Oxley), and who sold stock at the peak (Bob Toll) with inside information.

Here's the article in its entirety. Hey, it's Sunday. Print it out and read it over a nice cup of $5 coffee...

The housing industry — which largely carried the American economy through the tribulations of the 2000 stock-market crash, a recession and climbing oil prices — has lost its vigor in recent months and now has begun to bog down the broader economy, which slowed to a modest 2.5 percent growth rate this spring.

That was a sharp comedown from the 5.6 percent growth rate of the first quarter, the Commerce Department reported yesterday, caused in part by the third consecutive quarterly decline in spending on houses and apartment buildings, after several years of rapid growth.

It hasn’t slowed down a little bit — it has slowed down a lot,” said Doug McCraw, a developer who has scrapped his plans for a 205-unit condominium tower in a neighborhood just north of downtown Fort Lauderdale, Fla. “Anybody who did not have a shovel in the dirt has chosen to wait till the market settles.”

The housing slowdown is perhaps the clearest effect of the Federal Reserve’s two-year campaign of raising interest rates in a bid to tap the brakes on the economy and reduce inflation. That campaign has been largely successful, with the decline happening gradually while other parts of the economy, mainly the corporate sector, pick up much of the slack.

Housing is going from being far and away the most important contributor to growth to being a measurable drag, and it’s happening gracefully so far,” said Mark Zandi, chief economist of Moody’s Economy.com, a research company. “But there’s now a growing and measurable risk that things don’t go according to plan.”

The biggest risk, economists say, is that the optimism that fed the real-estate boom will reverse dramatically. The number of homes for sale has surged in recent months, particularly in once-hot markets, like the Northeast, Florida, California and parts of the Southwest. As builders delay land acquisition and construction it could reduce employment and spending in the coming months.

More broadly, just as rising housing prices during the boom added to Americans’ sense of wealth and well-being — encouraging them to spend more on a variety of goods and services — the reverse could dampen sentiment and lead consumers to pull back on their purchases.

While the fate of housing prices has received far more attention recently than real estate’s role as an engine of job growth, the sector has also become one of the country’s most important industries. Residential construction and all the activity that swirls around it — mortgage lending, renovations and the like — account for roughly 16 percent of the economy, making it the largest single sector, slightly bigger than health care.

For much of the last five years, housing — along with health care — was also one of the only reliable generators of jobs. From the start of 2001, when the Fed began cutting its benchmark rate to steady a faltering economy, until early last year, the housing sector added 1.1 million jobs.

The rest of economy lost 1.2 million jobs over the same period, according to an analysis by Moody’s Economy.com.

Housing continued its rapid growth last year, and other industries began hiring in far greater numbers than they had been, creating the healthiest national job market since 2000. In the last few months, though, three pillars of the housing sector — homebuilders, mortgage lenders and real-estate agencies — have stopped adding to their payrolls, and overall job growth in housing has begun to slow.

In South Florida and Las Vegas, where contractors until recently complained that they could not find enough workers to begin work on many projects, developers are scrubbing plans for new condominiums because they cannot sell enough units to get construction financing.

Mr. McCraw, the developer in Fort Lauderdale, said slowing condo sales and a 35 percent jump in the cost of construction materials like steel, copper and concrete convinced him to shelve his project. He is now considering building office space, where demand remains strong, or simply waiting for two years.

In Las Vegas, cranes are still busily at work on new casino projects but dozens of gleaming condominium towers that were slated to sprout up a few miles from the Strip are not likely to be joining the city’s neon-bedecked skyline soon. John Restrepo, a real estate consultant in the city, estimates that only about 7 percent of the 60,000 condominium units that were announced and under construction as of the first quarter of the year are actually being built today.

Among the high-profile projects that were scrapped is Las Ramblas, an 11-building, $3 billion condominium and hotel complex being developed by the Related Companies and Centra Properties and had investors like the actor George Clooney.

The period of irrational exuberance we saw in ’04 and ’05 and the gold rush fever has gone away,” Mr. Restrepo said.

The Commerce Department said yesterday that housing investment fell at an annual rate of 6.3 percent last quarter, after dropping less than 1 percent in each of the two previous quarters. It grew at roughly 9 percent a year during the previous three years.

Still, building activity for single-family homes, condos, hotels and casinos in Las Vegas is vibrant enough that construction workers are not struggling to find work, said George Vaughn, a business manager for a local of the Laborer’s International Union of North America, which represents almost 5,000 workers in Las Vegas. “The boom is still on,” he said.

The situation is somewhat different elsewhere. An official at the International Union of Bricklayers and Allied Craftworkers said housing work was more difficult to find, but most of its members had been able to find work on commercial building sites.

“If something were to happen with both markets, that would affect us — and everybody for that matter,” said Robert A. Fozio, director of the union’s Northern Ohio district.

On average, real-estate jobs pay somewhat less — about 7 percent less a year on average — than those in other parts of the economy. But real estate has also been one of the only industries creating good jobs for workers without college degrees in recent years, especially in construction and contracting work.

At Hovnanian Enterprises, one of the nation’s largest homebuilders, executives are renegotiating the company’s options to purchase land for future developments, in an effort to delay some transactions and reduce the purchase price on other parcels of land. In April, it forfeited $5.6 million in deposits on property near West Palm Beach, Fla., and Minneapolis, because it was not ready to build in the area.

“It doesn’t make sense to own the land and have it sit there,” said J. Larry Sorsby, the company’s chief financial officer and an executive vice president.

Orders for Hovnanian’s homes fell by 18 percent in the three months ended April 30 and cancellation of existing orders by homebuyers rose to 32 percent from 21 percent a year ago. The company, whose earnings jumped 34 percent to a record last year, is expecting a mere 3.4 percent profit increase this fiscal year.

Mr. Sorsby said the company had not resorted to layoffs, but it had been asking sub-contractors to lower labor costs — with some success.

Going forward, many economists say, the biggest question is whether the orderly real-estate slowdown the Fed has engineered thus far will continue. “Outside the threat of surging energy prices,’’ Mr. Zandi said, “the most significant threat to the expansion is that the housing correction turns into a housing crash.”

The fact that mortgage rates remain low by historical standards offers one reason to doubt that a crash will happen. The average rate on a 30-year conventional mortgage was 6.8 percent last week, up from 5.7 percent a year earlier, according to the Fed.

On the other hand, the boom of recent years has pushed housing prices out of reach for many families along the coasts. Already, some homeowners have resorted to creative loans, like interest-only mortgages, to afford a house, and even modest increases in mortgage rates have the potential to cause a significant drop in demand for new houses.

In either case, housing seems unlikely to continue being the economic powerhouse it was over the last five years.

“Housing is just not going to be what it has been,” said Edward Yardeni, chief investment strategist at Oak Associates, a money management firm. “It could go back to being a significant but relatively small contributor to economic growth.”


Anonymous said...

Poor Little Giant Corporate Homebuilder Hovnanian is having such a hard time that it is "asking sub-contractors to lower labor costs — with some success." Unbelievable, their houses are already built by illegals at minimum wage or below. That's right let the laborers shoulder this housing downturn. Do you suppose any Hovnanian takes a pay cut? Or anyone in management? Any person who buys a house from them should be tried for crimes against humanity. And tried for being stupid.

Smart Grid blogger said...

are HOMEBUILDERS investors still in housing bubble denial ???

Anonymous said...

Of course the times will report the bubble has burst. THey will do anything to paint as gloomy an economic picture as possible leading up to the election.

Democrats should hope the MSM focuses on the RE downturn and not the run the dow will take from now to the fall.

Unfortunatley such a negative focus on the RE sector may hasten the decline and lead to the inevitable recession that awaits whoever is elected in November.

Anonymous said...

There are a lot of people in OC, California in complete denial of the real estate bubble. My boss is spending crap loads of money on his house, putting down a sandstone drive way and a designer retaining wall and waterfall in the backyard. Some homeowners who used "creative financing" to bite the bullet a few years ago may get a rude awakening around springtime 2007 when their ARM adjusts, but I have a hard time believing the rich in OC will feel any financial pain at all - not that I want the rich to feel pain. The upcoming correction mentioned over and over on this forum appears to be a long, long way off, if you look at the spending habits of people in OC.

Anonymous said...

funny that anon above thinks the times is reporting the bubble to hurt bush

guess money magazine, fortune, wall street journal, cnn, msnbc, cnbc, fox news, washington post, usa today, the economist and almost every local paper are also just making this stuff up, huh?


Anonymous said...

As usual, the NYT missed the main story. Economic growth slowed because the inflation rate fudge factor for GDP was increased to a more reasonable value. They are still trying to hide the weenie though, and if the true inflation rate was used in the GDP calculation, my guess is economic growth would be nil.

Inflation is out of the bag, it is our future. Get used to it, plan for it.

Anonymous said...

Bush is the agressor. He
created the false metaphor "War on Terror"

Unfortunately for him we only pay tribute to leaders that focused on Peace rather than War.


History shows we hate agressors

Saddam Hussein

and now good ole George W. Bush.

Jip said...

Sorry anonymous, the economic situation has been on the skids for the past few years and getting worse. Case in point, as regular shoppers at discount stores (i.e. Ross, Marshalls, Burlington) my sister, best friend and yours truly have seen a great increase in customers. As a matter of fact, she wants things to get better so people will start "Fronting at the Mall stores again".

Anonymous said...

ivana trump had to cancel her high rise condo project slated to be built downtown beruit. That is G Bush's falt too? He is the devil.

Anonymous said...

A New Yorker here. Actually the NYT has held off reporting on the RE bubble as long as it could without losing credibility by omitting a major story.

And I would still draw a big distinction between stories like today's where the NYT is wearing its National Paper of Record hat and talks about housing as a "big picture" sector affecting the national economy, and the stories on the local (NYC, LI, Westchester, Jersey) real estate market where it's the same thing as any local paper: "In a slowing market, try staging your home"; "YOY price appreciation slows, but still robust"; "Our diverse economy makes us different from other parts of the country"; "Wall Street bonus money prolongs the boom"; positively spinning the latest condo high-rise project, and so on ad nauseam.

Anonymous said...

Actually, I would say that the most straight-shooting local paper chronicling the housing bust has been the Sacramento Bee, but then again they're pretty much Ground Zero of the housing crash so maybe they have no choice.

Anonymous said...

Yeah, but who believes the NYT anyway? They're in the "reality business".

The Real Estate Industrial Complex creates its own reality.

Anonymous said...

This guy is a major tool. The home builder is giving them the option to continue working by cutting costs or lose their jobs.

Anonymous said...

If you follow the real estate market at all you would have seen the peak last fall.
You would realise that you should have sold and taken a loss or break even if lucky.
Screw all the gready investors that thought they could buy and make 50% or more after a year.
They are getting what they deserve.
And I do mean you if you are one of them.
I have long term investments. I own them outright.
I couldn't sleep at night if I leveraged my credit to the max and did not follow the real estate market day by day.
I'm in tune to my portfolio value, how about you.


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