Dawn Of A New Housing Era?
Home building traditionally has been the lifeblood of many PHCP manufacturers and distributors, and notorious for boom and bust cycles. However, the latest bust is unprecedented in size and scope.
U.S. housing starts reached an all-time high in 1977 (the year I joined this industry) with 2.14 million. (All data cited here comes from the National Association of Home Builders and combines both single-family and multi-family units.) That was followed by a 2.02 million year in 1978. Then housing started a nosedive that ended at merely 1.06 million starts by 1982. How well I remember our industry’s agony when starts dropped in half over that five-year period. Yet that was a pinprick compared with today’s trauma.
Recovery began in 1983 as home building enjoyed a string of good if unspectacular years that lasted until 1990, when a three-year housing recession led starts to bottom out at 1.01 million in 1991. After that home building took off again, peaking in 2005 with 2.07 million starts. Along the way PHCP manufacturers came to regard a level of 1.5-1.6 million housing starts as a normal healthy level that enabled them to keep their factories humming near full capacity. The worst slumps found a floor at a little over 1 million starts.
Until the Great Recession. In 2008, housing starts totaled only 906,000 units, the first time since the 1940s housing failed to top 1 million units. Then the bottom dropped out last year to only 554,000 housing starts, the lowest since World War II, and this year’s pace is mired in the same sinkhole at about half the previous postwar lows - and this in a population that has grown by about a third since the dark days of the early ’80s. That’s how bad it is.
Most analysts predict housing won’t climb back to the previous abyss of 1 million starts until at least 2012, and several more years may pass before we return to the “normal” level of 1.5-1.6 million starts. Of course, that’s just “WAG” guesswork sprinkled with wishful thinking.
In the short run any housing recovery is stymied by a witch’s brew of nasty economics - massive inventory of unsold homes, continued foreclosures, high unemployment and stingy lending. It’s remarkable, and unsettling, that the housing market can’t gain traction even with mortgage rates tickling all-time lows.
In the past we could assume that housing would return to normal levels with a strong economy and job growth. Maybe so, but other signals suggest we may be in for diminished home building even after economic recovery.
Pre-World War II, fewer than half of American households owned a home. That rose to a peak of 69% in 2006, spurred by federal tax incentives favoring home ownership and subsidized credit through Fannie Mae and Freddie Mac (FM2). Along the way traditional lending standards got kicked aside.
I’m old enough to remember when lenders expected home buyers to put up 20% of the purchase price and devote no more than 25% of household income to mortgage payments and all other housing expenses. Those standards steadily eroded until the bubble burst when no-money-down mortgages came into view and people earning $50,000 a year were qualifying for $500,000 homes. Today’s lending crackdowns may seem draconian but actually are a return to the norms of old, in many cases still less demanding. Yet even if lenders decide to go wild again, they may find the government’s housing props wearing away beneath them.
Eventually our nation’s leaders will have to tackle the country’s massive debt burden. When serious people crunch the numbers they realize we cannot hope to get close to a balanced federal budget while retaining expensive sacred cows like mortgage interest and property tax deductions that cost the U.S. Treasury some $120 billion last year (source: Congressional Budget Office), and while continuing to backstop FM2’s combined $5 trillion in obligations. Long term, millions of households may have to exclude home ownership from their American dream.
Don’t read this as a tale of gloom. It’s just a reality check. The housing market is likely to remain moribund by historic standards as far ahead as any economic forecaster can see. The challenge to PHCP manufacturers and distributors is to wean themselves down to a “new normal” level of home building and be resilient in going after different market opportunities.
Resiliency is one of this industry’s greatest strengths. If you’ve survived thus far, you’ve already learned to roll with knockout punches.