Weak housing market weighs on job growth

John W. Schoen Senior producer • Profile • E-mail

Since the middle of last year, a downturn in the U.S. housing market has taken its toll on a wide group of people and companies, clobbering homebuilders, condo flippers, borrowers with weak credit, lenders who oversold loans, and just about anyone with a home for sale.

Now the housing slump is hitting yet another target: housing-related jobs, a list that includes everyone from the people who build and sell houses to makers of appliances and furnishings.

That's a sharp contrast to the height of the housing boom in 2005-06, when the industry was responsible for creating some 25,000 to 50,000 new jobs every month, according to Mark Zandi, chief economist at Moodys.com.

“In the recent months it’s been laying off workers at a pace of 25,000 to 50,000 per month,” he said. “And I think the next couple of quarters we’ll start seeing job losses of between 50,000 and 75,000 per month. ... I think the housing market is going down a whole other notch.”

With the global stock market on edge and analysts debating the odds of recession, the government’s monthly jobs data due out Friday will be scrutinized more closely than ever for hints of what lies ahead. 

Housing-related job losses once again put a dent in February job growth, which saw an overall gain of 97,000 — down from a gain of 111,000 in January. Employment in housing-related industries fell by 11,000 in February, bringing to 176,000 the total number of jobs lost in the sector since at sector since April 2006, according to figures compiled by Moodys.com.

Greenspan the oddsmaker
The odds are still against the economy slipping off the growth track it’s been on since the last recession in 2001, according to most economists. Former Fed Chairman Alan Greenspan, whose once-opaque statements have turned crystal clear in retirement, this week pegged the odds of recession at one in three. A survey of private economists last month pegged the odds at roughly one in four, according to Randell Moore, editor of Blue Chip Economic Indicators.

Regardless of what the experts think, consumers are showing signs of turning gloomy. A Wall Street Journal/NBC News poll released Wednesday showed that 31 percent of Americans expect the economy to get worse over the next year, compared with just 16 percent who felt that way two months ago.

To be sure, there’s still plenty of good news and positive data indicating that the economy remains on track. Consumer spending is holding up well, fueled by fairly strong wage gains. Despite the Federal Reserve’s public hand-wringing about price increases, inflation is fairly tame by historical standards. And while the U.S. economy appears to be slowing, the global economy remains relatively strong. Worldwide gross domestic product should grow by 5 percent this year and 5.2 percent in 2008, according to Kathleen Stephansen, head of global economics at Credit Suisse.

But the news from the front lines of the homebuilding industry remains gloomy. Sales of new homes plunged 17 percent in January, the latest monthly figures available. On Wednesday, D.R. Horton, the nation’s largest homebuilder, said it would take until January 2008 for the industry to work through a glut of unsold homes. Company CEO Don Tomnitz summed up the outlook by bluntly saying that 2007 “is going to suck.”

It’s not yet clear just how bad 2007 will be. The stock market’s recent gyrations have been fueled in part by growing concerns about wider economic damage from continued housing industry weakness and the rising number of defaults by borrowers at the low end of the credit scale, the so-called “subprime” mortgage market.

Concerns about the subprime market picked up this week after one of the biggest lenders, New Century, said last Friday its books were being investigated the Securities and Exchange Commission and the U.S. Attorney for the Central District of California. The news sparked a huge sell-off Monday in the stocks of lenders that are active in the market.

New Century's problems began last month when it said it needed to revise losses it had already reported. It also said that because of accounting mistakes, it underestimated how badly its loans were performing. Other subprime lenders have reported big losses and a jump in loan defaults. Regulators have issued new guidelines calling for tighter lending practices.

The recent rise in defaults follows a period of easy money that many observers say simply got out of hand, with speculators buying multiple homes they had no intention of occupying and lenders handing out mortgages to people who couldn't afford to repay them. Some trace the  spree to excess cash in the global money system from a variety of causes — from the Federal Reserve's aggressive rate-cutting early this decade to the piles of dollars being recycled by a booming economy in China and other emerging markets.

Sloshing liquidity
"Just as the case often was back in college, when you have too much liquidity sloshing around for too long, people tend to do some foolish things," Wachovia senior economist Mark Vitner wrote in a recent research note. "Apparently that includes loaning money to folks with spotty credit histories to purchase homes not only to live in but also to speculate on."

The resulting defaults are now hurting both lenders who ignored credit risks and the borrowers who couldn't afford their loans. But the relatively small losses reported so far could be part of a larger problem. That’s because the modern mortgage market is backed by billions of dollars of related securities — pools of mortgages that lenders sell to big investment brokerages, who chop them up into smaller chunks, sell them to investors and pocket a fee.

The advantage of this arrangement is that the risk of any one loan defaulting is spread among many investors. And as lenders sell off existing mortgages, the proceeds from those sales provide more money to lend to new home buyers.

The problem is that no one knows just who is holding this paper — or how much is concentrated in one place. Though regulators have relatively good data on the financial risks borne by banks and mortgage companies, an unregulated investor like a hedge fund could be sitting on a pile of shaky securities that represent future loan defaults.

“One of the reasons why this is as scary as it is that the market is completely opaque,” said Zandi.

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