Recovery Q&A with Peter Grist, Senior Economist, National Association of Home Builders
What is the main difference that you see in the industry this year, compared to previous years? From the peak in 2005 to the bottom in early 2009, home building and new home sales declined to their lowest levels since consistent records have been kept (1959 for housing starts and 1963 for sales). House prices, after nearly doubling from 2000 to 2006, have given back two thirds of those gains and are currently at early 2003 levels, according to the Case-Shiller national house price index.
The main difference in the industry in 2010 is the credible evidence that we did hit bottom in 2009 and are slowly but surely moving up from those lows. Housing starts and prices have increased, albeit sluggishly and are expected to continue to build momentum in the second half of 2010. Although new homes sold recently hit new lows, this is a temporary setback in the wake of the expiration of the first-time homebuyer tax credit.
Tight credit conditions are making it very difficult for home builders to obtain credit for land acquisition, development and construction (AD&C credit). This is holding back housing production and will make it difficult for builders to respond as housing demand improves. Consequently, the inventory of new homes for sale has fallen to levels last seen 40 years ago (the number of households has grown 80 percent over this period). It is also driving a shift in market share from small builders, who rely on commercial banks as a source of credit, to large companies with internally generated funds or access to public debt markets.
What changes do you expect to remain a part of our industry, and what do you think will fall to the wayside? Bank lending practices have tightened considerably in the aftermath of the housing boom. Although credit standards and lending practices tend to rise and fall over the economic cycle, this time around it will take much longer for credit conditions to return to pre-recession, pre-bubble normalcy. Similarly, while banks have reined in subprime lending, relative to the excesses during the boom, it will not completely disappear from the market.
Overinvesting in real estate, as represented by the “McMansion” phenomenon, pushed the limits of size and opulence to new heights, an ambition that will not be repeated soon. However, the trend toward larger, more comfortable living space has a long history, with the median square footage of single-family homes increasing from 1,500 to 2,200 since 1975. Once the market settles, home size is likely to continue its steady creep upwards.
Are there any aspects of the industry that you think are gone for good? The most notorious of the high-risk lending practices, loans that include low or no income documentation, teaser rates, minimal down payments and negative amortization options are unlikely to return.
Regarding Chicago, would you say the worst is behind us? The Chicago market definitely has the worst behind it. Chicago’s housing market certainly experienced the boom conditions of other markets, but to a lesser extent. Prices were less inflated than in the hottest markets and production was more restrained. Since then, prices have returned to pre-boom levels and stabilized. Production has improved from an early 2009 low. Recovery is expected to be a multi-year process. Production is currently at five thousand single-family starts per year compared to a normal level of 30 to 35 thousand. From the current low levels, continued growth is expected, rather than any significant downward movement in prices or production.
Are there any industry innovations born of these economic times? No, the aftermath of the housing bubble has been a challenging period for home builders, in an industry that is predominantly populated by small and family-owned businesses. Builders are struggling to compete in an environment of tight credit for small businesses against larger national builders with greater access to capital markets.
How will we know that we have “recovered”? From a home builder’s perspective, we will have recovered when housing production returns to something closer to normal, pre-boom levels. This will necessarily involve modestly rising house prices (roughly in line with nominal income growth), a reduction in foreclosure rates (to a more historical norm of 0.5 percent compared to the current 1.5 percent), and the availability of credit to both home builders and homebuyers.
Peter Grist is a Senior Economist, Economics and Housing Policy with the National Association of Home Builders. He can be reached at 202.266.8697.