Among the “good” economic news today was private residential construction spending, which rose 2% in November and 3.4% year-over-year, according to the Census Bureau, confirming similar trends in building permits and housing starts reported earlier. Construction creates lots of jobs and contributes significantly to GDP. Everyone, from the President down to local politicians, wants it to grow. It gets them reelected. But for homeowners, banks, and tax payers, these trends are costly.
Today’s housing market is a consequence of the credit bubble that the Greenspan Fed engineered. It sparked a speculative boom. Developers went crazy. Lenders made liar loans. Values soared. People bought houses sight-unseen to get rich. Cities and states collected taxes. Everyone was happy. When the construction bubble peaked in January 2006, housing starts hit an annual rate of 2.3 million units. But after years of overbuilding, the frenzy dried up. What was left was a housing glut. And vacant units became the root cause of the decline in home values.
There were a lot of them of vacant homes: 18.8 million in 2009, according to the Census Bureau. While reasonable people may have quibbles with that number, everyone agrees that the inventory of vacant units is immense. Whether it’s 18.8 million or 12 million units only changes the duration of the healing process, not the problem itself.
But the healing process is in trouble. If you rent or buy a home and move into it, you also move out of the property you’re in. Hence, no net impact on the inventory of vacant homes. What impacts it are wildfires, hurricanes, or rot. And household formation. Household formation is a demographic force that can mop up vacant homes in a hurry. Yet, it has declined over the last few years and was even negative for a while. In 2011, only 600,000 households were formed, a far cry from a range of one to two million a year in prior decades.
A blip caused by the financial crisis? Probably not. At least not entirely. Researchers have put their fingers on a number of issues, including the record low marriage rate and record high median age for first marriage (Pew Research Center)—a trend that has also manifested itself in other developed countries and is unlikely to reverse.
So, if the industry builds homes at the current rate rate of 685,000 units in 2012, and household formation stays at 600,000 for the year, then the inventory of vacant homes will grow by 85,000. OK, some of those homes may replace teardowns, but still. Any increase in residential construction spending simply worsens the problem.
In March 2011, the Case-Shiller Home Price Index hit a preliminary low—down 33.4% from its peak in June 2006. After a slight uptick over the spring and summer, the index started to decline again. The most recent data, published on December 27, reflected price levels of August, September, and October: down 3.4% from last year. As the index picks up seasonal price declines typical for the winter months, it will likely hit new lows. And so it will continue: periods of false hope followed by declines and new lows.
Price declines entail foreclosures, already a horrendous problem. Over 6 million borrowers are currently delinquent more than 30 days, and two million homes are in foreclosure. It’s a vicious cycle: foreclosure sales put downward pressure on prices, which causes further delinquencies and foreclosures. Banks are getting hit with losses—and so are taxpayers through the never-ending bailouts of Fannie Mae and Freddie Mac.