Housing Mired in Hard Times : Slowdown in Industry Is Having a Powerful Ripple Effect in Wide Swath of the Economy
It took Frances and Joel Grossman 11 months to sell the three-bedroom Los Angeles home they owned for six years. That was after remodeling their kitchen and slashing their asking price 30%.
“Some of our friends think we gave our house away by the standards of two years ago,” said Frances Grossman. “But it’s not two years ago. The economy isn’t great, and housing values just aren’t what they used to be.”
And it’s not just homeowners who are finding that out. An array of businesses that feed off housing activity--construction, home furnishings and brokerages--have been laid low by the industry’s problems.
“Business is down dramatically,” said John Zorich, executive vice president of Pacific Sales, a Torrance-based plumbing and appliance retail chain. “Contractors aren’t buying as much, and retail business is down too.”
Indeed, for the first time since World War II, the real estate industry is not playing its traditional role of leading and sustaining an economic recovery. After peaking in 1988 at 4.3 million units, nationwide sales of new and existing single-family homes have declined to under 3.8 million units annually.
Housing is a key U.S. industry with a huge ripple effect on the nation’s economy. It accounts for as much as 20% of the nation’s economic activity--supporting, among other things, 536,400 construction jobs, 547,200 real estate agent and manager positions and a multibillion-dollar mortgage industry.
Some economists and many builders insist that housing’s woes can be cured by easing lending restrictions and lowering interest rates further. But a few analysts say long-term demographic trends suggest that even with such steps housing may lose much of its power as an engine of the economy for the foreseeable future.
These analysts expect overall housing demand to grow at a slower pace in the next few decades because the huge baby boom generation that fueled the housing boom of the 1970s and ‘80s is getting older, and younger adults now forming households are a smaller group.
The recent slowdown in housing activity has already forced painful contractions in a host of allied industries, including banking, construction and home furnishings.
In Redondo Beach, Kelley Interiors is feeling the chill of the sluggish housing market. Owner Jean Lee blames slow home sales for a nearly 50% decline in business, forcing her to slash advertising and lay off two of her five employees.
Several home furnishing stores opened in the Airport Plaza shopping center on Crenshaw Boulevard and Pacific Coast Highway in the booming 1980s. But in the last few months, two stores have closed and the manager of a third says that business is off sharply.
Furniture retailers have been hit hard. Recent casualties include Barker Bros., which is liquidating its assets in bankruptcy court, and RB Furniture, Ortho Mattress Inc., W. J. Sloan and Furnishings 2000--all of which are seeking to reorganize under Chapter 11 bankruptcy.
Some paint retailers are also trying to stave off the housing slump in bankruptcy court. In February, Torrance-based Standard Brands Paint Co., a retailer with about 130 stores in eight Western states, filed for protection from its creditors, citing the slowdown in home sales as among the reasons.
Meanwhile, the nation’s leading maker of building and home furnishing products, Masco Corp., has seen its net income plummet from $288 million at the height of the housing boom in 1988 to $45 million in the year ended December, 1991.
Ironically, the recent drop in interest rates has made homes more affordable than they’ve been in more than a decade. Rates on 30-year fixed-rate mortgages are about 8%, and even lower on 15-year and adjustable-rate mortgages.
But for the most part, the drop has triggered more business for mortgage bankers than real estate agents and home sellers. About three in 10 mortgages last year were refinancings, and such transactions are expected to rise to $350 billion this year from $165 billion in 1991, according to the Mortgage Bankers Assn. in Washington.
The deluge of refinancing activity has saved some banking jobs supported by housing. But widespread layoffs in many industries have left tens of thousand of workers unable to afford a home or barely able to hang on to the one they have. Housing costs as a share of personal income remain high by historical standards, and that disparity, as well as consumer anxiety about job security and taking on additional debt, have pushed all but the most determined house hunters onto the real estate sidelines.
Luring them back into the housing market has consumed the attention of officials from President Bush to members of Congress.
The President has urged the Federal Reserve to cut interest rates further to stimulate home sales as well as the rest of the economy. Congress is debating a measure that would boost home sales by giving Americans new tax incentives.
“This is really a matter of concern,” said John Tuccillo, chief economist for the Chicago-based National Assn. of Realtors. “We are not going to have any significant economic recovery without some sort of boost from housing . . . particularly new (home) construction.” He said home sales have risen about 20% in the first six months of this year, but he noted that that is only about one-third of the increase home sales posted immediately after the last two major recessions in the early 1980s.
The problem may be most severe in Southern California, where the housing slump has been exacerbated by recent earthquakes and the Los Angeles riots. The median price of a home in Southern California’s six-county region fell 5.1% to $186,000 in June, from $196,000 in June a year ago, according to the Southern California Real Estate Observer, a Running Springs-based newsletter. And sales of new and existing homes fell 15.9% from June, 1991.
Mused Paul E. Griffin Jr., chairman of Calabasas-based Griffin Homes, which this year filed for Chapter 11 bankruptcy court protection after 79 years as a leading California builder: “I’ve been through a lot of recessions, and this is the worst I’ve ever seen. I don’t see a quick rebound. Most of my contemporaries are cutting their overhead down to the bone” and hunkering down.
Even in the Midwest--where the recession hasn’t hit as hard and where new housing construction jumped 14.3% in February after the Fed slashed interest rates in December--activity has slowed.
In the first six months of the year, home sales in the Chicago area managed a modest 15% increase over 1991, but since June, sales have slowed, said Ben Gerstman, president of the Multiple Listing Service of the Chicago Assn. of Realtors.
“The statistics don’t reflect the current” sales climate, Gerstman said. “Things have definitely become spotty. All of a sudden, no one’s in the market.”
In Columbus, Ind., consumer confidence has also been shaken. It took a recent announcement of a first-quarter profit at the city’s major employer, Cummins Engine Co., before many residents would venture into the housing market, said Mark A. Pratt, president of Breeden Inc. Realtors & Developers. Previously, although there had been some entry-level activity, the market for move-up homes in Columbus “was just about dead,” he said.
In New York City, buyers are more tightfisted than ever, real estate agents complain.
In the mid-1980s, flush young Wall Street professionals routinely bid up housing prices and snapped up even marginal properties. But now, said veteran real estate agent Louise Matisoff Dobi, who specializes in Manhattan’s co-op apartment market, buyers ask to see 60 to 70 homes before they make a decision.
“You work three times as hard to make half as much money,” she groused.
Of course, a few areas have rebounded. But they are mostly in states that were depressed during the 1980s housing boom, including Arizona, Oregon, Washington, Texas and Colorado.
“We almost have no (housing) inventory, things are moving so fast,” said Margaret Kelly, a regional director for Remax International Inc. in Englewood, Colo. Prices in the state haven’t yet caught up to their mid-1980s peak, but sales are up 30% over last year, she said.
Housing’s about-face in Colorado, which like Texas is rebounding from the mid-1980s oil bust, has revived an economy that only a few years ago seemed nearly moribund.
Employment in the state grew 1.4% last year. In Denver, retail sales are up 8.9% this year and construction employment has expanded by 11%, said Patricia Silverstein, chief economist for the Greater Denver Chamber of Commerce.
Rising home sales “have had a definite improvement on our economy. Home sales have a real multiplier effect,” she said.
The shopping spree undertaken by Los Angeles attorney Stephanie Pearl after she purchased a two-bedroom condominium in Westwood in February demonstrates the power of housing to spread largess through the economy. Pearl estimated that she has spent more than $20,000 on appliances, furniture, carpeting, fresh paint and new plumbing fixtures.
“You don’t realize how many things you have to get” when you buy a house, she said.
But today, there are too few Stephanie Pearls.
As the housing slump persists, it is beginning to affect even career decisions. Homeowners faced with job-relocation offers must decide whether to take a possible financial loss on their most valuable asset in exchange for a step up the corporate ladder.
Terry Burey, a development engineer at IBM’s Boca Raton, Fla., office, says he could suffer a huge loss on his home if he takes his employer’s offer to relocate to Raleigh, N.C. “Without a career, one wouldn’t really be able to afford a home, but you really have to balance things these days” because of slumping home values, Burey said.
Ted Manley, a salesman for a BellSouth Corp. cellular telephone subsidiary in Richmond, Va., realized how bad things were in Lakeland, Fla., when he was offered the job in Richmond.
Had his employer not bought his Lakeland home for the $153,000 he paid for it in 1990, Manley said he would have lost money in accepting the transfer. By the time he moved late last year, the house had dropped $13,000 in value.
“If it wasn’t for the relocation package my company offered me, I would have been scared as hell of making the move here,” Manley said.
Housing’s grim arithmetic is especially daunting for growing families who had hoped that rapid appreciation would catapult them into a bigger home in a few years.
The Grossmans in Los Angeles decided to sell their home just as prices headed south in Southern California. It took them almost a year to find a buyer at a price nearly a third lower than the original asking price.
Joel Grossman, an executive at Sony Pictures Entertainment, said the sales price provided them “only a very, very modest profit” on their six-year investment. But he believes that the move made sense because the more expensive home they are buying had declined even more in value over the last two years.
Amid the adversity, a few big home builders such as Los Angeles-based Kaufman & Broad and Hovnanian Enterprises Inc. in Red Bank, N.J., have carved out lucrative housing niches in a tough market by buying land cheap from distressed builders and thrifts. These fire-sale purchases have enabled resourceful builders to erect inexpensive but attractively designed homes that they are able to sell quickly by offering attractive financing to buyers.
Blessed with such a price advantage and brimming with more than $150 million in cash borrowed on the credit markets in the last 12 months, Hovnanian has nearly tripled its market share to more than 11% this year from 3.2% in 1985.
Similarly, home sales at Kaufman & Broad “are up 100% in the last two months over a year ago,” said Bruce Karatz, the company’s chief executive. Still, Karatz lamented, “it’s hard to say there’s an expanding housing market. Our expansion is coming at the expense of others who aren’t in a position to build.”
That’s the predicament of troubled Griffin Homes in Calabasas, which saw its home sales plunge from $201 million in 1990 to $94.5 million last year. It is now huddled with bankruptcy lawyers as its 11 Southern California housing projects stand mothballed.
The company hopes to be out of bankruptcy court and resume business later this year. But a chastened Griffin doesn’t foresee much of a rebound in the market until “well after the (presidential) election in November.”
“First, we need to get more jobs and buyer confidence back,” he said.
Sources: National Assn. of Home Builders and National Assn. of Realtors
Regional Housing Trends
In the most recent quarter, the depressed Northeast showed the greatest increase in home sales compared to a year ago. The West also showed some strength with the exception of California, which suffered a 10% drop in sales.
Existing home sales
Units in thousands
2nd qtr 3rd qtr 4th qtr 1st qtr 2nd qtr Area 1991 1991 1991 1992 1992 Northeast 578 561 536 585 603 Midwest 945 877 909 1,024 969 South 1,392 1,278 1,317 1,341 1,364 West 863 822 801 820 874 United States 3,767 3,528 3,563 3,770 3,803
Source: National Assn. of Realtors
