Housing industry faces a long, hard climb back

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

Despite recent signs of improvement, the housing industry still faces a long road back. 

How can the housing industry get us out of this recession?
— Maria R., Fort Worth, Texas

To the extent that housing led the economy into recession it’s hard to see how we get out of it without a recovery in housing. When that recovery comes, it will be from one of the deepest slumps in decades.

First, the good news. After a sickening 30 percent plunge in home prices since the market topped in mid-2006, the Standard & Poor's/Case-Shiller's U.S. National Home Price Index bumped up 3 percent in the second quarter — the first quarterly rise in three years. But prices are still down almost 15 percent from last year — at levels last seen in early 2003.

That price drop has left something like a third of homeowners with mortgages owing more than their house is worth. Which means that, unless prices begin rising strongly again, those people are stuck in their homes, unable to sell without writing a big check to the lender. Others may choose to “walk away,” sending another home to foreclosure where it will be sold by the lender or auctioned at a distressed price. Those foreclosure sales are going to make it tough for prices to recover quickly.

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The glut of foreclosures also creates a huge inventory of existing homes that will weigh on demand for new homes. All home sales help boost the economy because when families move to a new home they typically make big purchases for new furniture and appliances, along with trips to the local home improvement center.

But the biggest economic boost comes from spending on new construction, which flows through home builders to many corners of the economy, from building supplies and fixtures to wages for construction workers (who then spend that money on other goods and services). Without a big pickup in construction, any economic recovery will be weak.

The latest piece of good news on that score — which has helped fuel speculation that the housing industry has “hit bottom” — came from the recent release of July data for housing starts. Using the Census Department formula overall construction fell by 1 percent, but single-family homebuilding rose 1.6 percent.

But when you take out the seasonal adjustment — designed to smooth out the impact on the data of forces like weather — the number of actual single-family homes built in July fell by 4 percent from the month before and by 20 percent from last July. So far this year, the total number of housing starts is running 46 percent below the comparable period last year.

Even when we start to see healthy percent gains in housing construction, the industry has a long way to go to get back to where it was even before the mid-decade building boom. After peaking in January 2007, roughly one in five construction jobs has been lost to the housing bust. The ongoing pullback in commercial building continues to weigh on the construction job market. And the housing slump has sidelined millions more workers in related fields — like real estate sales and mortgage lending. Unless that trend can be reversed, it’s hard to see how the housing industry can lead the economy back out of the recession it created.

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