New-home slump keeping door shut on U.S. recovery


Plagued by too many houses and too few buyers, 2011 is shaping up to be the worst year on record for new-home sales. The slump is pushing the key home-building industry into its fifth year of decline and keeping the U.S. economy from a rebound.

After past recessions, home building was a crucial driver of growth, creating new jobs firmly planted on American soil. But housing isn’t helping out this time because builders’ hyperactivity during the boom years and the loss of hundreds of thousands of people’s homes to foreclosure have left a big supply of properties on the market.

Many economists don’t see a significant rebound occurring until housing is fixed.

“If the recovery is going to come, it is going to be driven by two sectors: manufacturing and construction, and it doesn’t look like there is going to be a big recovery in manufacturing,” said economist Ed Leamer, director of the UCLA Anderson Forecast. “It is going to have to come in housing; otherwise we are going to limp along as we have been.”


Nationally, new single-family homes sold at a seasonally adjusted annual rate of 298,000 in July, putting the industry on pace to post the lowest annual sales since the Commerce Department began keeping data in 1963. In California, the roughly 14,000 new homes sold statewide during the first seven months of 2011 mark the lowest total for that period since at least 1988, the year that real estate data provider DataQuick began keeping track.

“It is a lousy market, and it is not getting any better. It could get a lot worse,” said Patrick Newport, an economist for consulting firm IHS Global Insight. “Our view is there is a 40% chance of a recession, and that will probably drag housing prices down at least another 10%.”

The housing market’s malaise is reflected in construction employment.

From July 2010 to July 2011, such jobs declined in 148 out of 337 metropolitan areas, increased in 136 areas and were unchanged in 53, according to the Associated General Contractors of America. Construction work dropped 5% in the Los Angeles area and 4% in San Francisco.

Wall Street is giving home builders a vote of no confidence. Shares of the nation’s 12 largest publicly traded home builders, as tracked by a Standard & Poor’s index, have fallen 22.7% since the start of the year, while the broader market, as tracked by the S&P 500 index, is down 4.2%.

“Home builders’ prices, especially in the month of August, have really suffered,” S&P analyst Kenneth Leon said. “The stock markets look for a much weaker economy, and if there is going to be a weaker economy, it is going to directly affect the housing market.”

Shares of Los Angeles-based KB Home, for instance, have fallen so much that the company is valued by Wall Street at less than the cash on its books. The company has continued to build despite the head winds, announcing in August that it had opened new homes for sale in the San Francisco Bay Area.


“It is a tough market, but we think we have been really bringing new things to the market, said Craig LeMessurier, a spokesman for KB Home. “We were one of the first to bring solar, to drive down costs,” he said, adding: “We continue to focus on affordability.”

Builders’ slower sales pace may be a kind of self-inflicted wound. The big companies are not dropping their prices, analysts said, because they can’t go any lower and continue covering their costs. Sales of foreclosed homes are keeping prices low, and builders can’t compete with those discounted levels.

“The home builders either don’t want to, or can’t, compete with the resales right now,” said Gerd-Ulf Krueger, principal economist at

There are some signs of deepening retrenchment. Calabasas-based Ryland Group Inc. recently said it was ending operations in Jacksonville, Fla., and Dallas.

Several builders have diversified into other activities since the downturn.

Toll Bros. Inc. is beginning to build in more luxury markets, putting up high rises in Manhattan as well as getting into managing golf courses, said Leon of S&P. Beazer Homes USA Inc. is going into the rental market, taking some of the many vacant homes in Arizona, fixing them and renting them out. KB Home has made a big push into more sustainable building and energy efficient design.

“KB holds the dominant position in going green, which I think will catch on for young families,” Leon said. “It just doesn’t play that great with such a severe downturn.”


Charlie McLaughlin, chief executive of consulting firm Black Swan Advisors, said his outlook for the big home builders remains pessimistic. He thinks things may begin to turn around for them in 2012, but only if Washington redoubles its efforts to spur job growth.

“As long as we have 9.5% unemployment, it is going to be difficult to get sales rates to increase,” he said.

McLaughlin predicts national sales figures will fall below 200,000 in 2012. If that happens, options will dwindle for many builders saddled with significant debt loads, although smaller companies with projects in urban areas stand a better chance of success, he said.

Not everyone has a dire outlook for big builders. Ivy Zelman, an influential housing analyst, contends that this could be the best time to buy builder stocks, and that the home-building industry should begin to recover after 2011.

Although sales are bad, from a historical perspective, the number of homes available for sale also is very low. New-home sales typically make up 15% to 20% of the housing market and they are currently running about 8% of the market, Zelman said.

“The problem is people don’t have credit and people don’t have the down payment, and we have a huge risk associated with what is going to happen in Washington,” she said. “There is a lot of uncertainty about the new housing market.”


But she said that “we think a lot of the weakness of the housing market is really sentiment-related,” meaning that once potential buyers feel more secure about the future, they will step up.

“The outlook is gloomy, but I don’t think it is going to look much worse from now on,” she said. “The builders “have enough cash on their balance sheets and enough debt that doesn’t come due for a few years that they are not going to be out of business next year.”