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Originally published Friday, August 3, 2012 at 8:00 PM

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Amid the U.S. housing recovery, signs of another slowdown

As the residential-property market climbs back from the worst collapse since the Great Depression, homebuilders across the nation need more customers for the industry to enter a sustainable recovery and help drive U.S. economic growth.

Bloomberg News

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Rob Gray moved his family of four from Massachusetts to Texas, where he bought a new five-bedroom, five-bath, two-fireplace home built by Toll Brothers.

After completing the deal on July 26 for the $572,000 brick-and-stone house in Allen, about 30 miles north of Dallas, Gray and his wife, Paula, plan to spend about $30,000 on new furniture, appliances, window treatments and an outdoor grill.

"We're not afraid to roll the dice, to take a leap of faith on the U.S. economy," said Gray, an insurance-company recruiter. "Things are on the rebound, and we need to get off the sidelines."

As the residential-property market climbs back from the worst collapse since the Great Depression, homebuilders across the nation need more customers like the Grays for the industry to enter a sustainable recovery and help drive U.S. economic growth.

While orders for new homes are rising at the fastest rate in two years and housing may be a net contributor to the economy's expansion for the first time since 2005, slowing job growth, tight housing inventories and a backlog of foreclosures threaten to put the brakes on a comeback.

"The gun is cocked with insane affordability," said Stan Humphries, chief economist at property-data provider Seattle-based Zillow.

"The conundrum is why more people aren't coming off the fence. Two things are keeping them on the sidelines: economic uncertainty, and the fear of falling home prices. And I think both of those have started to be reduced," Humphries said.

Good signs

Recent data has been bullish. Builders broke ground on new single-family houses at an annual pace of 539,000 last month, up 4.7 percent from May and the fastest rate since April 2010, the Commerce Department said on July 18.

Confidence among U.S. homebuilders increased in July by the most in close to a decade, according to a National Association of Home Builders/Wells Fargo index.

In the three months ended June 30, orders swelled 32 percent at PulteGroup, the largest builder by revenue, and 25 percent at D.R. Horton, the biggest by volume. Wall Street has noticed; shares of U.S. homebuilders are up about 50 percent this year.

Housing affordability reached a record high in the first quarter, according to the National Association of Realtors, thanks to record-low interest rates.

The low rates helped persuade Vyonnie Matthews, a retail-store manager in Chicago, to stop renting and buy a home. She opted for a new Pulte house in Yorkville, a suburb south of the city, because the existing homes she looked at were small or in poor condition.

"We started looking to buy based on the interest rates going down," Matthews said. "People are out there, and they're saying, 'Let's do it.' "

The homeownership rate, which reached a record 69.2 percent in 2004, rose to 65.6 percent in the second quarter from a 15-year low in the prior three months, the Census Bureau said.

Still, the recovery faces significant headwinds.

Growth in residential fixed investment, the term economists use for spending on home construction and remodeling, slowed in the second quarter as the U.S. economic expansion decelerated, according to Commerce Department data.

Key numbers

Residential investment increased at a 9.7 percent annual rate, down from 21.5 percent in the first quarter, and contributed 0.22 percentage point to the gross domestic product's (GDP) annualized gain of 1.5 percent. That was down from a 0.43 percentage point contribution to the first quarter's 2 percent GDP growth.

Since 1947, residential fixed investment has added an average 0.1 percentage point to economic growth as the U.S. GDP grew an average of 3.25 percent annually, according to Daniel McCue, research manager at the Harvard Joint Center for Housing Studies.

After each of five recessions from 1970 to 2001, residential fixed investment (RFI) added an average of 0.9 percentage point to an average growth rate of 4.6 percent, he said.

"The contribution of RFI was nine times normal, or 20 percent of GDP growth," McCue said. This time around, "I don't know if housing is set up to lead the economy back because of the fallout from past excesses."

Working through those past excesses is taking years.

Homeowners had $9.18 trillion in mortgage debt at the end of the first quarter, down 19 percent from a September 2007 peak of $11.3 trillion, according to the Federal Reserve.

Home prices have fallen further than the debt. They're 34 percent below their July 2006 peak, according to an S&P/Case-Shiller index of prices in 20 metropolitan markets, including Seattle.

That's left owners of 11.4 million homes underwater, or owing more than their properties are worth, as of March 31, according to data company CoreLogic.

Good time to buy

Some buyers unburdened by debt are jumping into the housing market.

Jenn Zepernick, a property manager in Orlando, Fla., and her husband waited until they had paid off their student debt, felt secure in their jobs and could take advantage of low interest rates before they decided to leave their rental and buy a home.

The Zepernicks are paying about $285,000 for a newly built four-bedroom Pulte house near Orlando.

The family qualified for a loan insured by the Federal Housing Administration because they were considered first-time homebuyers even though Jenn Zepernick had owned a place for a few years in the early 2000s.

"It's always great to have a new home at a great mortgage rate — you can't beat that," she said. "With the market doing so well, we were like, 'This was a no-brainer.' "

Slowdown ahead?

Home sales picked up for a few months at a time in 2009, in 2010 and last year, spurred by falling unemployment and government incentives such as tax credits.

Then the revivals petered out as events including the 2010 Gulf of Mexico oil spill and the March 2011 Japanese earthquake undermined enthusiasm.

This year may bring another repeat, after a weakening of U.S. consumer confidence and job growth in the second quarter. The unemployment rate held at 8.2 percent last month and hasn't been below 8 percent since January 2009.

"Housing demand appears to have hit a soft spot, coinciding with the slowdown in the wider economy," said Paul Diggle, a housing analyst with Capital Economics wrote in a report. "Nevertheless, the market for new homes is still among the tightest it has been in the previous six years and, on past form, is consistent with rising housing starts."

Along with weak demand, a lack of supply may be holding back sales.

There were 144,000 new homes available for sale in June, a 4.9-month supply, down from a peak of 12.2 months in January 2009.

The 2.39 million existing homes listed for sale in June — a 6.6-month supply — is limiting sales of existing properties and driving some buyers to purchase from homebuilders, according to Lawrence Yun, chief economist for the National Association of Realtors.

While it may be tempering sales, tight inventory is helping to push prices higher in some markets, including the Seattle area. The median price of single-family houses sold in June in King County was $380,000, up 10.1 percent from June 2011, the first double-digit increase in nearly five years.

Material from The Seattle Times archives is included in this report.

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