EconSouth (Second Quarter 2007)

From Spotlight to Shadow: Housing's Luster Fades

Once a bright star on the U.S. economic stage, the housing industry is no longer headlining the show. From a boom as recent as 2005, housing construction and the industries that support it are falling on difficult times and appear unlikely to make a quick comeback.

house under construction
Paralleling housing markets throughout the country, the once-sizzling Southeast home construction industry has cooled. While the slowdown has been especially pronounced in Florida, permits for new residential construction are down throughout the region.

As the clatter of hammers subsides, the effects of an ongoing housing slump are rippling through the Southeastern and national economies.

The housing industry's post-boom downturn has not dragged the nation or the Southeast into recession. Federal Reserve Chairman Ben Bernanke noted in early June that so far there have been no "major spillovers from housing onto other sectors of the economy."

Nevertheless, the slowdown is restraining economic growth nationwide, particularly in sectors tied to residential construction. Home builders, construction materials suppliers, hardware chains, appliance sellers, and specialty retailers of home products have all reported declining business because of the housing woes.

Real gross domestic product (GDP) growth slowed to a bit more than 2 percent over the past year, down from average annual growth of 3.75 percent the previous three years. The economy stalled further in the first quarter of 2007 to an estimated real GDP growth of 0.6 percent, according to the U.S. Bureau of Economic Analysis (BEA).

"The cooling of the housing market is an important source of this slowdown," Bernanke said in a May speech. BEA figures show that fixed residential investment, the portion of GDP that housing makes up, has slipped in every quarter since the fourth quarter of 2005. In each of the last three quarters through March 2007, the decline in fixed residential investment has lopped off roughly 1 percent from real GDP growth.

Housing's bright lights dim in Florida
In the Southeast, Florida is the most striking example of the housing slump's dampening effect. After several boom years, the Sunshine State's job growth has waned, and the construction industry generally has been a notable laggard. Florida's employment gains dipped from 4 percent in 2005 to 2.6 percent in 2006 to only 1.7 percent in the first quarter of this year. For overall construction in Florida, payroll peaked in June 2006 at 644,800 workers. Since then, Florida lost 18,600 construction jobs through May 2007, according to the U.S. Bureau of Labor Statistics.

An end to Florida's residential construction boom would affect not only the construction industry but also banking and finance, real estate sales, wholesale and retail trade (particularly lumber and furniture), and manufacturing companies that are related to construction, said David Denslow, a professor of economics at the University of Florida. Sagging house prices and slowing construction would reduce spending, relative to historical trends, "on everything from cars to restaurant meals to state and local government," he added.

Related Links
On the Web:
National Association of Home Builders Web site
National Association of Realtors Web site
Associated General Contractors of America Web site

Indeed, through March, Florida's taxable sales of autos and accessories, consumer durables, building investment goods, and business investment goods were down on a year-over-year basis. Building investment as a category fell most—more than 20 percent from March 2006 levels.

"I'm still hopeful the end of the [housing] boom will not harm Florida too seriously," Denslow said. "After all, the demographic trend is with us as the boomers retire. If there's no national recession, we should be OK, though not booming."

While there are glimmers of hope, recovery still eludes Florida's housing sector. According to the National Association of Realtors, the state's year-over-year existing home sales were down 25 percent in the first quarter of 2007, an improvement over the 33 percent drop in the last quarter of 2006. But reports from Florida home builders indicated that new home sales remained weak in the first quarter, and new home prices declined in March compared with a year earlier. Not surprisingly, permits for new residential construction were down more than 50 percent in the first quarter of 2007.

A shadow on Southeastern housing
The housing construction and home sales story is much the same, though less pronounced, throughout the Southeast, where home builders report weak new home sales.

Sales of existing single-family homes are also lagging throughout the region, according to data from the National Association of Realtors. In the first quarter of 2007, year-over-year sales of existing homes were down 4.1 percent in Alabama, 7.4 percent in Georgia, 19.5 percent in Louisiana, 11 percent in Mississippi, and 15.5 percent in Tennessee.

Southeastern home construction seems unlikely to rebound soon. During the first quarter of 2007, permits issued for new residential construction were off 14 percent in Alabama, 22 percent in Georgia, and 21 percent in Tennessee versus the first quarter of 2006. Rebuilding from Hurricane Katrina continues to influence building plans in Mississippi and Louisiana. Mississippi's permits were 30 percent higher in the first quarter of 2007 than year-earlier levels, but Louisiana's fell 14 percent after a 53 percent increase in the last three months of 2006.

Miami-based builder Lennar Corp. reported that in its quarter that ended Feb. 28, orders for new homes in its eastern U.S. operation, which includes Florida, were 33 percent lower than in the same quarter a year ago. The division reported lower revenue and an operating loss mainly because of lower sales in Florida.

In the six months ending in March, Atlanta-based Beazer Homes reported that orders for new homes in its Southeast segment—which covers Georgia, Nashville, and the Carolinas—dipped 27 percent while closings fell 21 percent compared with the corresponding period a year earlier.

Both Beazer and Lennar also reported, in Securities and Exchange Commission (SEC) filings, that they had recently sold or declined to exercise options on land instead of building homes on it.

Only a glimmer at the end of the tunnel
The housing industry has been hit by a convergence of factors that distinguish this downturn from past cycles, said John Wieland, founder, chairman, and chief creative officer of Atlanta-based John Wieland Homes and Neighborhoods, which builds homes in Georgia, Tennessee, and the Carolinas. Wieland, a former chairman of the Atlanta Fed board of directors, said that whereas housing slumps have traditionally been caused mainly by rising interest rates, that is not the case now.

lumber in a warehouse

The current torpor in housing, Wieland believes, stems from a combination of factors that include tightening credit; abundant foreclosures that depress prices; uncertainty, which leads some would-be buyers to sit on the sidelines of the market in hopes of getting lower prices later; and economic weakness across the country that reduces in-migration to the Southeast. He noted that the Atlanta market also suffers from having many large hometown corporations—including BellSouth, Georgia-Pacific, and Scientific-Atlanta—that were recently downsized by new parent companies.

"I am shocked, and I don't shock too easily," Wieland said. "I don't know anybody out there that is 'doing well.' And the bankruptcies of the builders in Atlanta are starting."

Wieland figures the home building industry will not regain the heights it reached during the recent boom, which he said produced an unrealistically high number of housing starts. The industry must contract, and that contraction will be painful, he added.

"There is core demand for housing," Wieland said. "As excesses get flushed out of the system and it starts to rationalize, . . . businesses with appropriate services and business plans will start to flourish again."

Gloom spreads through related industries
Until prosperity returns, though, the downturn is not only buffeting home builders but also industries that rely on home construction. For Nashville-based lumber supplier Louisiana-Pacific, sales in the first quarter of 2007 tumbled 40 percent and profits dipped from $83.7 million in the first quarter of 2006 to a net loss of $37.3 million. The company's major product lines include oriented strand board, siding, and engineered wood products, all of which are widely used in residential construction. In an SEC filing, the company cites "significantly reduced housing starts" as a major reason for slumping demand for its wares. (For more on the construction downturn's repercussions in the lumber industry, see the Q&A with Lee Thomas of Rayonier.)

The effects of declining home building are filtering through to retailers of home-related products as well. Atlanta-based Home Depot, which operates about 300 stores in the Southeast, reported that the housing dip knocked down its first-quarter comparable-store retail sales nationally by 7.6 percent from the same period a year ago, according to a company earnings report. That drop followed a 2.8 percent decline in same-store sales, a measure of business at stores open for a year or more, for the fiscal year 2006.

Home Depot Chief Executive Officer Frank Blake, during a February conference call with securities analysts, noted that declining housing starts nationally reduced the demand for the appliances and construction products his company's stores sell. The 8 percent-plus drop in existing home sales in 2006, he added, dented demand for paint and remodeling products.

Because the housing industry is a key ingredient in Home Depot's success, Blake said his company tracks fixed residential investment. He noted that fixed residential investment as a percentage of nominal GDP reached 6.3 percent in late 2005 but ended the first quarter of 2007 at 5 percent. Also, Blake said, mortgage equity withdrawals have fallen, and housing inventory continues to accumulate.

"So we continue to see headwinds in our market and are not planning for any near-term market improvement," Blake noted during a May conference call to discuss the company's first quarter earnings.

Home Depot is hardly alone. Whirlpool Corp., the biggest U.S. maker of home appliances, reported that, excluding its acquisition of Maytag, its first quarter 2007 sales were 5 percent lower than in the same quarter a year before. The company also said domestic demand for appliances industrywide dipped 9.5 percent during the same year-over-year period. Based on industry assumptions that housing starts will decline by 15 percent, Whirlpool forecasts U.S. appliance demand will fall another 2 to 3 percent in 2007.

In a company earnings announcement, retail icon Sears reported lower comparable-store sales in the first quarter of 2007, including "a notable decline in home appliance sales, which [it believes] reflects both a slower U.S. housing market and the impact of increased competition."

Carpet producer Mohawk Industries Inc., based in Calhoun, Ga., also reported, in SEC filings and an earnings release, that a sales decline in the first three months of the year was caused mainly by a decline in housing.

Economic data as well as Atlanta Fed interviews and informal surveys of home builders and real estate agents reveal few signs of significant improvement in the housing industry. Likewise, industries tied to residential construction—manufacturers and distributors of residential construction-related goods and wholesalers and retailers that specialize in home-related products—are also feeling the pinch and are not expected to rebound quickly.

This article was written by EconSouth staff writer Charles Davidson and Michael Chriszt, director of international and regional analysis for the regional group of the Atlanta Fed's research department.