Builders' lobbyist: We made too many homes
Chief of National Association of Home Builders says overbuilding by some members was one factor in the housing meltdown.
NEW YORK (CNNMoney.com) -- Builders deserve some blame for the nation's housing and mortgage problems because some overbuilt, flooding the market with new properties, according to leading advocate for the homebuilders.
Jerry Howard, chief executive of the National Association of Home Builders, told CNNMoney.com that numerous problems caused the sharp slump in the housing and mortgage markets, but he added that overbuilding during the boom years was a contributing factor.
"There were some builders [who] were probably overly aggressive. There's no question about that," Howard said. "Economists were starting to say this is a cyclical business and we are going to get into a downturn. But some guys were chasing the gold and pursuing the brass ring, and they didn't heed the market warnings as quickly as they should have."
Government figures show that 6.2 million new single-family homes were completed between 2003 and 2006 - hitting record levels year after year during the boom.
Howard also said builders underestimated how much speculative investors were pumping up the market and didn't do enough early on to keep such buyers from snapping up inventory.
"We now find out in hindsight it played an important role and a very dangerous role," he said. "For the first time that I can remember, you saw investors coming into the housing markets and trying to play it into almost like a day stock."
As investors have been sidelined and it has gotten harder for those shopping for new homes as a residence to get a loan or sell their existing home, the pace of home building and new home sales have plunged.
Through the first 10 months of 2007, building has plummeted 23 percent to 1.3 million completed homes, according to government statistics. Howard is forecasting an even lower level of construction in 2008 - down to 1.3 million for the full year - as builders continue to try to work through their inventory. But he believes that sales and construction can rebound to an annual rate of about 1.8 million homes after that.
"The underlying demand is there and the underlying need for housing will be there once we work through some of those problems areas," he said.
Of course, overbuilding was hardly the only force that contributed to the housing bubble and recent meltdown. Lenders loosened underwriting standards too much. Buyers took out loans on homes they couldn't afford, often with the anticipation of using them simply for investment purposes. And real estate agents convinced buyers that prices couldn't go down.
Some housing economists say that relative to lenders, realtors and buyers, the builders' culpability for the downturn is pretty limited.
"You can say they should have known better. But they weren't deceiving anyone," said Dean Baker, co-director of the Center for Economic and Policy Research.
Baker said a boom in building was bound to happen due to the bubble in home values; builders were responding to the market conditions, not creating them.
"I put them low on the list as villains for the story," Baker said. "If there's a high price for houses, people build them."
But Baker believes that Howard may be overly optimistic in judging how long it will take for the market to recover. Baker expects a flood of foreclosures and even a recession at some point next year.
"The only way they [new home sales and building] normalize next summer is if you have an even deeper plunge in construction between now and then," Baker said. "It probably will be into 2009, and it could well be into 2010 before there's a recovery. My bet is we'll see a recession, and depending on how things shape up, it could be a long recession."
A government report shows that there were 191,000 completed new homes sitting on the market at the end of October - about 14 percent more than a year earlier. Add in new homes for sale that are not yet started and those in construction and the supply of new homes reaches more than 500,000, or enough to constitute a supply of eight and a half months.
In turn, new home prices have been pushed down. The median price of a new home dropped a record 13 percent to $217,800 in October. Howard, the Home Builders CEO, said he wouldn't be surprised to see further price declines ahead.
All the major publicly traded builders have been taking large charges to write down the value of the inventory of homes and properties. On Nov. 30 Lennar (LEN, Fortune 500), the No. 1 home builder by revenue, reported that it was selling 11,000 properties to the real estate arm of Wall Street firm Morgan Stanley (MS, Fortune 500) for only 40 percent of its previously stated value.
Howard said he can't comment on specifics of pricing, but he said he doubts that individual home buyers will be able to find new homes at 50 or 60 percent discounts, even if prices decline further.
"I don't think you're going to see pricing that low," he said.
Charges due to reduced land and home valuations have caused many builders to report larger-than-expected losses recently. D.R. Horton (DHI, Fortune 500), the No. 3 builder, reported a smaller-than-expected loss Nov. 20, but that followed a quarter with a loss that was much wider than forecast.
Hovnanian Enterprises (HOV, Fortune 500), the nation's No. 6 builder by revenue, has stated that the pace of sales in October "significantly deteriorated" in most of its markets. In October, credit rating agency Moody's downgraded the debt of Lennar, No. 2 builder Centex (CTX, Fortune 500) and No. 4 Pulte Homes (PHM, Fortune 500) to junk bond status.
Howard says one key to the recovery is various reform bills pending before Congress affecting the Federal Housing Administration loan standards, as well as government-sponsored mortgage finance firms Fannie Mae (FNM) and Freddie Mac (FRE, Fortune 500), as well as some tax measures aimed at easing the subprime mortgage crisis.
If Washington follows through on its proposals, Howard said, the housing market will begin its recovery by the third quarter of next year and turn around in 2009.
"Maybe we've finally hit the bottom," he said.