Data on Homes Cause Jitters
Home prices nationwide declined last month for the first time in more than a decade, raising new concerns about the real estate slump and the damage it might do to the rest of the economy.
The 1.7% decline in the median price of existing homes sold in August was the first year-over-year drop since April 1995, the National Assn. of Realtors said Monday. Also, the number of houses sold fell for a fifth straight month and the supply of unsold homes on the market rose to a record.
The price picture is slightly brighter in Southern California, but home builders, real estate agents and loan brokers here are starting to feel the pain. Los Angeles-based KB Home said last week that new-home orders on the West Coast plunged 58% in the three months ended Aug. 31 compared with a year earlier. Countrywide Financial Corp. of Calabasas, the nation’s biggest mortgage lender, warned workers last week to brace for layoffs.
“Things are clearly turning down pretty hard” for residential real estate, said Jan Hatzius, an economist at investment firm Goldman, Sachs & Co. in New York. “You’re going to have some payback from this” in the economy overall, he said.
Just how much payback is in store -- and how consumer spending may be affected by the downturn -- is a matter of growing debate among economists.
Many analysts believe that the economy is strong enough to avoid falling into recession even if housing continues to weaken. “You have to be careful not to exaggerate how much [housing] dampens the economy given that everything else other than the auto sector is doing well,” Federal Reserve Bank of Dallas President Richard Fisher said after a speech Monday.
But the real estate boom of the last decade has been unprecedented in size and scope, which raises the risk that the downside also could exceed forecasters’ best guesses, said Eric Belsky, executive director of Harvard University’s Joint Center for Housing Studies.
After any boom, “there’s a tendency to predict a more gradual unwinding than actually occurs,” he said.
Housing’s troubles pose two main threats: one to millions of jobs directly dependent on the business, the other to homeowners’ willingness and ability to spend if they feel poorer because of the trend in property prices.
About 10 million jobs are tied directly to residential real estate, from construction workers to escrow agents to the clerks at the local hardware store, Goldman Sachs estimates. That’s about 7% of total U.S. employment. Some analysts believe the total is closer to 10%.
Soaring job growth in construction, real estate sales, mortgage lending and related businesses helped buoy otherwise anemic employment gains from 2001 to 2004 as companies hired to meet the spectacular appetite for homes.
Some housing-related businesses already have begun to jettison workers. Calabasas-based builder Ryland Group Inc. says it has cut its workforce by 10% this year nationwide to 3,000.
“Everyone is tightening their belts,” said Irene Genders, president of the California Escrow Assn. “We’re expecting this to be a little while.”
Still, employment cuts overall have been modest, at least as measured by government payroll data, which don’t pick up freelance workers. Payroll jobs in residential construction totaled 3.31 million in August, off just fractionally from the 3.33 million at the start of the year, Labor Department data show.
Andy Perkins, San Diego branch manager for Orco Construction Supply, said he believed that job losses were just beginning as housing projects finish up and builders find little or no new demand.
More construction equipment is coming back to his stores rather than moving to another job, Perkins said. “San Diego has set the trend for the business falling off the shelf” in single-family homes, he said.
Goldman Sachs estimates that the housing sector nationwide could shed 1.5 million to 2 million jobs over the next several years as the industry retrenches. The result could be to reduce total U.S. employment growth to a monthly average of 100,000 jobs in 2007, from an average of 150,000 a month over the last three years, the firm said.
Direct employment in real-estate-related industries is just part of the equation when measuring the sector’s influence on the economy. There also is the so-called wealth effect that housing prices have on consumers’ spending.
Rocketing home prices over the last decade provided many Americans with an income windfall, either from the outright sales of houses at a profit or from mortgage refinancings or credit lines that allowed homeowners to cash in some of their accumulated equity.
A study coauthored by then-Federal Reserve Chairman Alan Greenspan last year estimated that mortgage-equity withdrawals tied to surging real estate values added $600 billion to consumers’ disposable income in 2004 alone, making up about 7% of the total that year.
But home prices are now slipping. The National Assn. of Realtors said the median price for a previously owned home, including condominiums, fell to $225,000 in August, down 1.7% from a year earlier.
“Prices are going to get worse before they get better,” said David Lereah, chief economist at the Realtors’ association, citing the glut of homes on the market. The for-sale inventory reached 3.92 million units in August, up 1.5% from July and a 7 1/2 -month supply at current sales rates.
In California, prices are still rising, but more slowly. The statewide median price of a previously owned, detached single-family home was up 1.6% in August from a year earlier, to $576,360, but home sales plunged 30%, the California Assn. of Realtors said Monday.
In Southern California, the median price of all homes and condos rose 2.7% last month from the year-earlier level, to $489,000, according to DataQuick Information Systems.
As home prices level off or decline, the risk is that consumer spending also could weaken significantly. And because that spending accounts for two-thirds of U.S. economic activity, a marked slowdown could threaten to chill the economic expansion that began in 2001.
Hit by record gasoline prices, consumers began to cut back on spending in the second quarter, reducing real U.S. gross domestic product growth to an annualized rate of 2.9%, down from 3.2% for all of 2005.
But predicting how consumers’ spending will change because of the end of the housing price explosion is a tough call, many analysts say.
John Silvia, an economist at banking firm Wachovia Corp. in Charlotte, N.C., said that although consumers unquestionably benefited from the housing-appreciation windfall, people’s spending patterns generally depended on whether their employment income was rising.
“Consumption is driven by income. As long as that income growth is there, consumers will go back to their spending patterns” in place before any bonuses they enjoyed, Silvia said.
So far, the psychological hit from ebbing home prices is being tempered by rising personal income and by a relatively low unemployment rate of 4.7%, said Stuart Gabriel, head of the USC Lusk Center for Real Estate.
What’s more, the long run-up in home values has given many people a reservoir of untapped equity. “Most people still have a ton of money in their houses,” said Scott Simon, a real estate expert at Pacific Investment Management Co. in Newport Beach.
Falling energy prices and lower interest rates also may soften the blow from housing weakness.
Oil prices have dropped 20% since July, paring prices at the pump. And mortgage interest rates have been easing, which could lessen worries about rising home foreclosures in 2007 as some homeowners with floating-rate loans face payment hikes.
Set against a strong U.S. and global economy, the downturn in housing may at worst shave about 1 percentage point off U.S. growth in 2007, many forecasters now say. That could mean growth of about 2% -- slow but still respectable for an aging economic expansion.
But Goldman’s Hatzius said the risk was that housing could see a much harder landing than now appears reasonable.
“We have never seen the kind of housing boom nationally that we’ve seen over the last six or seven years,” he said. “So to know what’s on the other side of the boom is very difficult.”
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(BEGIN TEXT OF INFOBOX)
Foundation crack?
A glut of homes . . .
. . . bodes ill for jobs in housing sector
Number of jobs tied to the housing market in 2005
(in millions)
Trade contractors: 4.4
Construction workers: 1.8
Real estate agents: 1.4
Property managers: 0.9
Mortgage brokers: 0.8
Furniture manufacturing, retail: 0.7
Sources: Bloomberg News, Goldman Sachs
