NY Times: Housing Slows, Taking Big Toll on the Economy


Richard Moore

Original source URL:

July 29, 2006

Housing Slows, Taking Big Toll on the Economy

The housing industry ‹ which largely carried the American economy through the 
tribulations of the 2000 stock-market crash, a recession and climbing oil prices
‹ has lost its vigor in recent months and now has begun to bog down the broader 
economy, which slowed to a modest 2.5 percent growth rate this spring.

That was a sharp comedown from the 5.6 percent growth rate of the first quarter,
the Commerce Department reported yesterday, caused in part by the third 
consecutive quarterly decline in spending on houses and apartment buildings, 
after several years of rapid growth.

³It hasn¹t slowed down a little bit ‹ it has slowed down a lot,² said Doug 
McCraw, a developer who has scrapped his plans for a 205-unit condominium tower 
in a neighborhood just north of downtown Fort Lauderdale, Fla. ³Anybody who did 
not have a shovel in the dirt has chosen to wait till the market settles.²

The housing slowdown is perhaps the clearest effect of the Federal Reserve¹s 
two-year campaign of raising interest rates in a bid to tap the brakes on the 
economy and reduce inflation. That campaign has been largely successful, with 
the decline happening gradually while other parts of the economy, mainly the 
corporate sector, pick up much of the slack.

³Housing is going from being far and away the most important contributor to 
growth to being a measurable drag, and it¹s happening gracefully so far,² said 
Mark Zandi, chief economist of Moody¹s Economy.com, a research company. ³But 
there¹s now a growing and measurable risk that things don¹t go according to 

The biggest risk, economists say, is that the optimism that fed the real-estate 
boom will reverse dramatically. The number of homes for sale has surged in 
recent months, particularly in once-hot markets, like the Northeast, Florida, 
California and parts of the Southwest. As builders delay land acquisition and 
construction it could reduce employment and spending in the coming months.

More broadly, just as rising housing prices during the boom added to Americans¹ 
sense of wealth and well-being ‹ encouraging them to spend more on a variety of 
goods and services ‹ the reverse could dampen sentiment and lead consumers to 
pull back on their purchases.

While the fate of housing prices has received far more attention recently than 
real estate¹s role as an engine of job growth, the sector has also become one of
the country¹s most important industries. Residential construction and all the 
activity that swirls around it ‹ mortgage lending, renovations and the like ‹ 
account for roughly 16 percent of the economy, making it the largest single 
sector, slightly bigger than health care.

For much of the last five years, housing ‹ along with health care ‹ was also one
of the only reliable generators of jobs. From the start of 2001, when the Fed 
began cutting its benchmark rate to steady a faltering economy, until early last
year, the housing sector added 1.1 million jobs.

The rest of economy lost 1.2 million jobs over the same period, according to an 
analysis by Moody¹s Economy.com.

Housing continued its rapid growth last year, and other industries began hiring 
in far greater numbers than they had been, creating the healthiest national job 
market since 2000. In the last few months, though, three pillars of the housing 
sector ‹ homebuilders, mortgage lenders and real-estate agencies ‹ have stopped 
adding to their payrolls, and overall job growth in housing has begun to slow.

In South Florida and Las Vegas, where contractors until recently complained that
they could not find enough workers to begin work on many projects, developers 
are scrubbing plans for new condominiums because they cannot sell enough units 
to get construction financing.

Mr. McCraw, the developer in Fort Lauderdale, said slowing condo sales and a 35 
percent jump in the cost of construction materials like steel, copper and 
concrete convinced him to shelve his project. He is now considering building 
office space, where demand remains strong, or simply waiting for two years.

In Las Vegas, cranes are still busily at work on new casino projects but dozens 
of gleaming condominium towers that were slated to sprout up a few miles from 
the Strip are not likely to be joining the city¹s neon-bedecked skyline soon. 
John Restrepo, a real estate consultant in the city, estimates that only about 7
percent of the 60,000 condominium units that were announced and under 
construction as of the first quarter of the year are actually being built today.

Among the high-profile projects that were scrapped is Las Ramblas, an 
11-building, $3 billion condominium and hotel complex being developed by the 
Related Companies and Centra Properties and had investors like the actor George 

³The period of irrational exuberance we saw in ¹04 and ¹05 and the gold rush 
fever has gone away,² Mr. Restrepo said.

The Commerce Department said yesterday that housing investment fell at an annual
rate of 6.3 percent last quarter, after dropping less than 1 percent in each of 
the two previous quarters. It grew at roughly 9 percent a year during the 
previous three years.

Still, building activity for single-family homes, condos, hotels and casinos in 
Las Vegas is vibrant enough that construction workers are not struggling to find
work, said George Vaughn, a business manager for a local of the Laborer¹s 
International Union of North America, which represents almost 5,000 workers in 
Las Vegas. ³The boom is still on,² he said.

The situation is somewhat different elsewhere. An official at the International 
Union of Bricklayers and Allied Craftworkers said housing work was more 
difficult to find, but most of its members had been able to find work on 
commercial building sites.

³If something were to happen with both markets, that would affect us ‹ and 
everybody for that matter,² said Robert A. Fozio, director of the union¹s 
Northern Ohio district.

On average, real-estate jobs pay somewhat less ‹ about 7 percent less a year on 
average ‹ than those in other parts of the economy. But real estate has also 
been one of the only industries creating good jobs for workers without college 
degrees in recent years, especially in construction and contracting work.

At Hovnanian Enterprises, one of the nation¹s largest homebuilders, executives 
are renegotiating the company¹s options to purchase land for future 
developments, in an effort to delay some transactions and reduce the purchase 
price on other parcels of land. In April, it forfeited $5.6 million in deposits 
on property near West Palm Beach, Fla., and Minneapolis, because it was not 
ready to build in the area.

³It doesn¹t make sense to own the land and have it sit there,² said J. Larry 
Sorsby, the company¹s chief financial officer and an executive vice president.

Orders for Hovnanian¹s homes fell by 18 percent in the three months ended April 
30 and cancellation of existing orders by homebuyers rose to 32 percent from 21 
percent a year ago. The company, whose earnings jumped 34 percent to a record 
last year, is expecting a mere 3.4 percent profit increase this fiscal year.

Mr. Sorsby said the company had not resorted to layoffs, but it had been asking 
sub-contractors to lower labor costs ‹ with some success.

Going forward, many economists say, the biggest question is whether the orderly 
real-estate slowdown the Fed has engineered thus far will continue. ³Outside the
threat of surging energy prices,¹¹ Mr. Zandi said, ³the most significant threat 
to the expansion is that the housing correction turns into a housing crash.²

The fact that mortgage rates remain low by historical standards offers one 
reason to doubt that a crash will happen. The average rate on a 30-year 
conventional mortgage was 6.8 percent last week, up from 5.7 percent a year 
earlier, according to the Fed.

On the other hand, the boom of recent years has pushed housing prices out of 
reach for many families along the coasts. Already, some homeowners have resorted
to creative loans, like interest-only mortgages, to afford a house, and even 
modest increases in mortgage rates have the potential to cause a significant 
drop in demand for new houses.

In either case, housing seems unlikely to continue being the economic powerhouse
it was over the last five years.

³Housing is just not going to be what it has been,² said Edward Yardeni, chief 
investment strategist at Oak Associates, a money management firm. ³It could go 
back to being a significant but relatively small contributor to economic 

Jeremy W. Peters contributed reporting for this article.

Copyright 2006 The New York Times Company

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