Our industry may have to learn to prosper with “new normal” starts.
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
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
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
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
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.
Dawn Of A New Housing Era?
October 1, 2010