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Housing has led recovery in every recession but this one

August 21, 2011

Jerry Howard, CEO
By U.S Chamber of Commerce

National Association of Home Builders In searching for a growth catalyst, today’s idle home builders can put the U.S. economy on the growth trajectory that has failed to materialize in the past couple of years of so-called recovery. Housing—a sector responsible for a full 18% of economic activity in normal times—has led the way to higher ground following every recession in our post-World War II history.

That hasn’t happened this time, and we are seeing the dismal results. The leadership in Washington is running out of ideas, leaving America staring into the abyss, when it should be embracing the opportunity to harness the power of home building to create new jobs, rejuvenate the business community, make existing home owners whole again, and rescue and preserve the highly esteemed institution of homeownership, which has defined the social vibrancy of our neighborhoods for generations.

On the policy front, the restoration of the housing marketplace and the housing finance system supporting it will require some heavy lifting. This is, however, a job that can be accomplished if we can get the right policies in place and overcome the formidable regulatory impediments that have been streaming out of the federal government with alarming regularity.

Some Localities See Resurgence
To start moving forward, it needs to be recognized that the housing marketplace is actually made up of thousands of local markets. They may be hard to spot when the marketplace is painted with a broad brush. But across the country there are places whose economies are performing fairly well, unemployment is significantly below the national average, and housing supply and demand are moving into balance. It is in such localities that resurgence in residential construction could start yielding benefits for the economy in short order.

A new analytic tool created by the National Association of Home Builders (NAHB) and being introduced this fall will identify the local markets that are showing signs of resilience. The NAHB Improving Market Index (IMI) will use government statistics on employment, building permits, and house prices to determine which markets are poised for growth and in a position to lead a broader recovery.

These promising starting points for an expansion can be easy to miss because one-third of the states where conditions are the worst and where production is down the most from the normal pace that occurred in the early years of the previous decade account for about half of U.S. housing activity most of the time. By comparison, one-third of the states where the best housing markets are now to be found, such as North Dakota, normally deliver 20% of the homes produced nationwide.

Rising to lofty levels during the boom, housing markets in Phoenix, Las Vegas, Atlanta, and Miami took the hardest tumble during the downturn and now have a longer climb back than the many smaller, healthier markets in their shadows.

Similarly, discouraging news on the unemployment front, with the number of people in the United States employed today no greater than in 2003, is grabbing the headlines when there are more encouraging stories of job growth to be told. Some metro areas are well above 2003, with increases of 21% in Odessa, Texas; 19% in Jacksonville, North Carolina; and 19% in Hinesville, Georgia. And although home prices have plunged by a third nationally, also receding to 2003 levels, home price indexes have recorded gains over that benchmark year of 88% in Midland, Texas; 56% in Honolulu; and 54% in Morgantown, West Virginia. The contagion of the Great Recession radiated from the hottest housing markets, where prices and production soared through the roof, out to markets that were bystanders to the exuberance of the boom. The recession scuttled virtually every market across the land. The cure will work in reverse, with markets that caught the virus when they were in relatively good health the first to rally, paving the way for a widening recovery.

There are, unfortunately, financial constraints that must be addressed to turn this scenario into a reality. NAHB’s new tool will be able to track the healing process as it progresses, and it is just what the bank regulators should have in their hands to end the dearth of lending for home building that persists from coast to coast. It is crucial for traditional lenders to reopen for business and recognize those places calling for new housing supply.

Homebuilding Is Essential for Job Creation

The return to home building is an essential ingredient for creating jobs and renewing the economic vitality of our neighborhoods. Each new single-family home represents three full-time jobs and helps boost the consumption of goods and services driving the pulse of the local economy. If they don’t replenish property tax revenue, municipalities and the states face a bleak future. The cupboard is bare. Accommodating housing growth will ultimately provide the financial means to support schools, ensure public health and safety, and alleviate the fiscal threat to our quality of life.

Opening up the flow of credit for the small home builders, who are a mainstay of the housing industry, also offers hope for small businesses in general, which account for half of private nonfarm gross domestic product and 65% of job growth. A recent article in Bloomberg/Business Week cites researchers at the Federal Reserve Bank of Cleveland who say that declining housing prices have hurt small business finances. According to the National Federation of Independent Business, 94% of small business employers own their homes, and a quarter of them, according to Barlow Research Associates, borrow against their homes for business purposes. The housing bust has cost business owners a bundle—$7.9 billion, according to estimates of the Cleveland Fed. Clearly, a full-scale recovery of small business owners can’t occur without a housing rebound.

Impediments to access capital are not the only regulatory challenge facing home builders and other small businesses. Unleashing the ability of entrepreneurs to create new jobs will require attention to regulatory obstacles in such areas as immigration, health care, and the environment.

Lending Standards Have Gone Overboard

Despite low mortgage interest rates and home prices, prospective home buyers also find themselves in a bind. Mortgage lending standards have tightened considerably, and regulatory and legislative proposals could make financing a home purchase much more difficult in the future. There is no argument that lending practices became too lax in the boom years, putting many homes in the hands of buyers who could not afford them. However, attempts to address this problem have gone overboard and run the danger of preventing deserving families from enjoying the many benefits of homeownership.

Prior to the boom, for decades, our housing finance system was a model for the rest of the world. It supported a wide range of buyers and did a good job of determining whether a borrower could afford a loan. Surely we are able to limit credit risk without unfairly cutting off the middle class and today’s large generation of young Americans who will soon be establishing households and entering the housing market.

We have wasted a good two years trying to propel the economy into a sustainable recovery. Without housing playing its part, the wimpy performance of our powerful economy is no surprise. The long-overdue return to prosperity that has eluded us so far is within reach, and that is why putting housing on the path to growth deserves the highest priority.

  
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John Fairplay August 21, 2011

What recovery?

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