Dark Clouds Over Housing

Copyright © 2012 Albuquerque Journal

Home construction traditionally has been a leader in economic recoveries across the country and in New Mexico, stimulating job growth and spending that spreads throughout the economy.

“This is certainly not the case this time around as homebuilding has lagged behind other activity,” said Jeffrey Mitchell, senior research scientist at the University of New Mexico’s Bureau of Business and Economic Research.

Building permits were issued for 770 single-family homes in the Albuquerque metro area during the first six months of the year, a 13.2 percent increase from 680 homes permitted a year earlier, according to DataTraq. Last year was the worst year locally for homebuilding since 1990 and, before that, 1982.

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Nationwide, permits issued for single-family homes increased 19.6 percent over the same six-month period from a year earlier, the Census Bureau reported.

At the current pace of home construction, the metro is on track to finish the year with roughly the same number of new homes as the 1,403 built in 1980. Even that could be a stretch as the presidential election race heats up, some say.

“On top of the headwinds in the economy, the negativism in political ads will discourage people from making a long-term commitment (to buy a house) for big money,” said Jim Smith, who was in the construction supply business for 25 years before a career change to commercial real estate broker.

Dark clouds

Another dark cloud is the potential for automatic cuts to the federal budget — what’s called sequestration — that could cost New Mexico an estimated 20,000 jobs, noted developer Paul Silverman of Geltmore LLC. The budget cuts would begin to kick in in January if Congress doesn’t take action to stop them.

If sequestration happens, he said, “We’re screwed.”

With home construction at a historic 30-year low, the implications for the broader local economy do not appear good.

“Since home construction has led the country out of most of the recessions of the last 80 years, it’s difficult to imagine a meaningful recovery without a viable and growing housing industry,” said Jim Folkman, executive director of HBA, the local homebuilder’s group.

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Housing consumption was a major factor in the national recoveries from the economic recessions of 1990-91 and 2001, said Albuquerque Mayor Richard Berry. The recovery from the Great Recession of 2007-09 is led by exports and, to a lesser degree, consumer spending, he said.

“You barely see a sliver for housing,” Berry said. “This is not an Albuquerque thing or a New Mexico thing, it’s a national phenomenon that has to be addressed from the national level on down.”

Bleeding construction jobs

The metro’s construction job sector lost 12,800 jobs from June 2006, during the building boom, to June 2012, a 40 percent decline that drops the sector’s employment to the level of the early 1990s, according to state labor data.

The job losses reflect the downturn in all types of construction, not just homebuilding, and account for almost half of all jobs lost in the metro over the past six years. The displacement of that many workers in a single job sector is rare in the metro.

“Many of the construction workers we have lost have retrained themselves, going into new industries; have moved to more robust housing markets, or are simply trying to hang on until the market returns,” Folkman said.

The Great Recession and the jobless recovery that has followed present only a partial explanation of why construction in general, and homebuilding in particular, has fallen on such hard times.

The homebuilding boom of the mid-2000s, which was a component of the housing bubble, set the stage for a big fall, experts say. The bubble was fueled by lax mortgage-lending standards, contributing to the so-called mortgage meltdown of mid-2007 and the waves of foreclosures that have followed.

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‘Not sustainable’

The 8,818 single-family homes built in the metro during the peak construction year of 2005 — 9,445 new homes if you count housing built at Kirtland Air Force Base — represented about 40 percent of the overall residential real estate market that year. In 2011, new homes represented 14 percent of the market.

“The very high numbers mid-decade are reflective of a housing boom that was simply not sustainable,” said BBER Director Lee Reynis in an email.

The boom-to-bust cycle resulted in an overhang of available inventory, particularly from foreclosures, on the supply side, Mitchell explained. On the demand side, sluggish employment and tighter lending standards have reduced the pool of potential homebuyers, he said.

There’s also competition for homebuyers with the much deeper inventory of existing homes for sale in the metro.

The market for existing homes appears to be improving modestly after hitting an apparent bottom in 2011. The Greater Albuquerque Association of Realtors’ report on second-quarter activity shows increases in both home prices and sales volume, as well as decreases in listings and average days on the market.

Buying-and-selling activity in the existing home market is not an economic engine like homebuilding, although Folkman said an industry study shows the average family spends $8,905 on home-related purchases in the first year of buying a home, new or used.

New vs. existing

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A problem that new homes have in competing with existing homes is land-related costs, which as a rule of thumb add 23 percent to 25 percent to the price of a new home, Silverman said. The costs include the acquisition of the lot itself, plus building the street out front and installing all the utilities.

“Land costs are more of a nonfactor with existing homes,” he said.

Yet ownership of a pristine new home has an enduring appeal to many homebuyers. “People will pay more for a new home than one that’s been lived in if the location is the same,” Silverman said.

In addition, growing environmental awareness among consumers — the “reduce, reuse, recycle” trend — has increased interest in new green-certified homes that are both energy-efficient and built in an environmentally friendly manner, Berry said.

Most observers don’t see construction returning to the pace of 7,446 homes built each year in the metro during the 2003-06 boom, according to DataTraq and HBA data.

A historical view points to an equilibrium of 4,000 to 4,500 permits for new homes a year, which was the pace of the mid-to-late 1990s, Smith said. Folkman put the sustainable pace that the metro area should be able to eventually get back to lower than that.

“Given the new economic reality I think we find ourselves in, both locally and nationally, I think that number is probably closer to 3,500 for the foreseeable future,” Folkman said.

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