Hindsight is always 20-20, but reading the Harvard Joint Center for Housing Studies' State of the Nation's Housing 2008 (released June 23 and available at www.jchs.harvard.edu), you can't help but wonder why so few saw the crash coming.
The signs were as subtle as a Roadrunner cartoon. When the roadrunner (the market) takes off at impossible speed with Wile E. Coyote (the industry) in hot pursuit on a newly-purchased Acme rocket sled (exotic mortgages), every 5-year-old knows whats coming: first the cliff, then the mid-air pause while gravity waits for the coyote to realize his mistake, then the poof of dust on the canyon floor below.
So here we sit in the impact crater. The question is whether the rocket sled is about to land on our heads, and according to the Joint Center, it might.
Some dealers are seeing signs of life already and everyone hopes 2009 will be the year builders start building again. According to the report, the odds are against it. "Six of the last seven housing downturns preceded a recession," and if that happens, "housing starts are likely to slide even further."
The situation is so murky, it's not clear whether we're in a recession. The Federal Reserve says no, and by the technical definition--two consecutive quarters of declining gross domestic product--that's true. Others beg to differ, including Warren Buffet, Alan Greenspan, and 79% of Americans in a June 9 CNN Money poll.
The underpinnings of that opinion gap lead to a warning flag that the Joint Center has raised in every State of the Nation's Housing report since 2001 and that has gone mostly unnoticed.Predatory lending and lax credit standards have been blamed for the collapse. But credit standards were actually eased in the early 1990s when automated underwriting and statistical modeling enabled prime lenders to "relax down payment and debt-to-income requirements while maintaining ... expected default rates." Neither prices nor defaults rose as a result.
The 1990s and 2000s both saw strong economic growth; the difference is that the '90s also saw strong income growth. Inflation-adjusted median income today is lower than it was in 1999. "The widening mismatch between housing costs and incomes reflects several forces," notes the Joint Center, but one is "the growing number of low-wage and part-time jobs generated by the economy."
The Harvard Joint Center is no hotbed of social activism, but the facts are piling up. From 2001 to 2006, the number of homeowners spending at least 50% of their income on housing rose by over a third to nearly 12% of all homeowners; 38% of them are in the two middle-income quartiles. Among owner and renter households spending over half their income on housing, 19% have two or more wage earners and one out of six children--12.7 million--lives in those homes. Last but not least, "while accounting for only 10% of all adults, veterans make up between 23% and 40% of homeless adults."
Household formation is still projected to be stronger in the next decade than the last one. If the recession is mild--and the Joint Center says most economists believe it will be--the result should be "a strong rebound in housing once prices bottom out and the economy begins to recover."
But it won't be the same unless the middle class also rebounds. Dealers aren't known for social activism, either, but in how many other industries can a kid with a high school diploma earn enough to support a family on a single salary?
Housing isn't the only thing that needs fixing, but when the market does turn, our industry could play a much larger role in the recovery than many imagine.
Greg Brooks is a former editor of ProSales and an industry speaker and analyst. For more information on Greg's new seminar, "The Next Boom: Four Trends Reshaping the Construction Supply Marketplace," call 502-376-0407 or email Greg@CS24.us.