Real estate, the residential sector in particular, is making bleak headlines around the globe in 2008. Plunkett Research has been warning of a potential crash since 2006 in what was obviously an overheated market. The real estate and construction sectors, including the many professions and fields associated with them, make up one of the larger components of the U.S. economy. For 2007, the U.S. Bureau of Labor estimates that 7.6 million Americans worked in construction and 1.5 million worked in the real estate industry. However, employment in real estate and construction had been rising for years, to numbers that are now unsustainable, and early 2008 found tens of thousands of jobs being eliminated from these fields.
About $1.12 trillion in new construction was put in place during 2007, according to the U.S. Bureau of the Census, which means that the construction field accounted for about 8.5% of all economic output in the U.S. There was more than $14.6 trillion in outstanding mortgage debt in America at year-end 2007. However, billions of dollars of that amount is unrecoverable as mortgage holders were writing-off massive amounts of mortgage assets in early 2008.
Sales of existing homes dropped dramatically in 2007, to about 5 million for the year (from 6.48 million in 2006), and sales of new single-family homes plummeted to about 775,000 (from 1.05 million in 2006). Clearly, homebuilders are suffering. For example, Pulte Homes, Inc., one of the world's largest builders of new homes, saw its revenues soar from $8.8 billion in 2003 to $14.5 billion at its peak in 2005. Sales dropped a bit in 2006 as the market started cooling off, to $14.0 billion, but in 2007 the bottom fell out, with Pulte's revenues dropping to $9.1 billion. Pulte's average sales price was about $337,000 in 2007, but homes in its nearly 690 communities often were priced at less than $200,000. Many of Pulte's customers had been people of modest financial means (and less than perfect credit) who had taken advantage of the fact that getting a mortgage had been nearly as easy as ordering a Big Mac at McDonald's. This was the "subprime" market at work. On the opposite end of the spectrum, luxury home builder Toll Brothers saw sales rocket from $2.7 billion in 2003 to $6.1 billion at its peak in 2006. By 2007, sales had already fallen to $4.6 billion, and the bottom likely has not been reached. Here too, buyers of these expensive homes (averaging about $688,000) found it incredibly easy to get a mortgage, often a mortgage that they couldn't afford in the long run.
For the 2000 through 2005 period, residential construction and sales of existing homes were extremely strong. However, by the end of 2006, the residential market had slumped, and home prices were declining in many cities. 2007 saw a steady deterioration in the housing market in the U.S., although there are a handful of major cities that remained relatively strong in early 2007, including Houston, Austin, Seattle and Portland.
For the 12 months ending February 2008, the National Association of Home Builders (NAHB) estimates that new single-family building permits issued in the U.S. were off by 40%. This followed several years of record highs in new home construction.
Through 2005 and 2006, there was a tremendous construction market in such sectors as office buildings, hotels, hospitals, shopping centers and state and local government construction projects. These commercial projects remained a strong, positive influence on the construction market through much of 2007. However, by the end of 2007, demand was off, and it was vastly harder to obtain financial backing for new commercial projects.
Commercial construction spending had been at record levels. Private sector (non-governmental), non-residential construction put in place in the U.S. reached $296 billion in 2006, growing to $349 billion in 2007 according to figures compiled by the U.S. Census Bureau. Very strong growth was seen in the hotel/motel sector and in electric utility generating plants, as well as in telecommunications facilities.
Commercial public sector (for government), non-residential construction was $255 billion in 2006, growing to $287 billion in 2007. (It should be noted that Census Bureau survey methods may miss a large quantity of smaller projects.) There will be continuing good demand from the ever-hot health care sector for new or remodeled properties as America's 77 million Baby Boomers continue to age and require more medical care.
(Note: There are several excellent sources for home sales and pricing data, including the Mortgage Bankers Association (MBA), the National Association of Realtors (NAR), the Census Bureau and others. Figures may vary depending on which source you access. On the residential side, Census Bureau figures show that 1.04 million new single and multi-family homes were started in 2007, down from 1.8 million in 2006. MBA, America's leading mortgage industry group, comes up with different numbers. It estimates that 1.35 million new single and multi-family houses were started in 2007, and predicts that that number will drop to 929,000 in 2008, rising slightly to 969,000 in 2009. MBA's estimates are pretty much in line with estimates by the NAR.
The median sales price for an existing home in 2006 was $221,900, according to the NAR, slipping to $218,900 in 2007. For 2008, it predicts further declines. As of February 2008, the NAR's numbers showed a median sales price that had crashed to $195,900.
The median sales price for new homes in 2006 was $246,500, according to the NAR. The organization's figures showed that the number was nearly unchanged in 2007 at $247,200.
Problems can arise when housing prices rise at a rate much higher than the increase in average household income, which has been the situation in all of the hottest housing markets of the recent past. Many home purchasers have been stretching to buy their homes. Some have gone into far too much debt. Some buyers are using "interest only" loans to reduce the amount of their monthly payments. Others have used risky adjustable-rate mortgages (ARMs) to reduce their payments. For example, some ARMs that adjust interest rates once each year initially offer rates that are about 1.5% lower than those of fixed-rate mortgages. However, homeowners with ARMs have recently seen their mortgage payments increase substantially at adjustment time. Foreclosure rates are up, and home values have been hurt as a result.
Atypically, the housing market was strong during the economic slowdown of 2000-2003. Credit was easier to get than ever, and interest rates were low (in mid-2003, homebuyers were able to get 30-year mortgages at an amazingly low 5%), helping home sales soar. A $2,400 monthly house payment afforded a buyer a home worth $424,000 in 2000 (net of taxes and insurance, and factoring in a 20% down payment). In early 2005, that same payment bought a $525,000 home. Often, unsophisticated consumers are more concerned about their monthly payment amount than they are about the total price paid.
Apartment house operators were particularly hard-hit by the boom in home ownership. Vacancy rates skyrocketed while renters took advantage of extremely low interest rates (and mortgage plans with low or no down payments) to buy a piece of the American dream. However, by early 2007, vacancy rates began falling and landlords found they could raise rents in many markets as home sales slowed.
What's in store for the housing market? As 2008 began, the picture was dim for most major markets in America, the U.K., Ireland and Spain.
In America, existing home sales, new home sales and median prices are off substantially. Worse still, the inventory of existing homes for sale is up. Large numbers of homes are either under foreclosure proceedings or are now owned by lenders. For the most part, these homes will be sold at low prices, putting downward pressure on the market overall. Unemployment is rising, and consumer confidence is at very low levels. A particularly harmful problem faces the housing market, because it is now much more difficult to qualify for and obtain a mortgage.
Home remodeling, about a $228 billion sector in 2006, has dropped substantially, resulting in declines in profits at building center giants Home Depot and Lowe's. For example, at Home Depot, net sales for the fiscal year ending February 3, 2008 were down by 2.1%, or $1.6 billion, to $77.3 billion, while net profits were off 23.7%.
The size of the average new home in the U.S. grew steadily for several years, reaching 2,412 square feet in 2005, and 2,495 square feet in 2006. However, this figure has likely flattened out and may decline over the long term.