|Title:||United States change in home prices by selected metropolitan areas in percentages for year ending August 2011|
|Source:||CFO The Magazine for Senior Financial Executives|
Start of full article - but without data
HOUSING BY THE NUMBERS
Only two metro areas saw home prices increase
between August 2010 and August 2011.
LAS VEGAS -X.X
LOS ANGELES -X.X
NEW YORK -X.X
SAN DIEGO -X.X
SAN FRANCISCO -X.X
Source: S&P/Case-Shiller Home Price Index
Note: Table made from bar graph.
>> Mortgage-backed securities. Collateralized debt obligations. NINJA mortgages. Neg-am loans. What was once arcane real-estate jargon became the language of the Great Recession, as the bursting of the housing bubble sent the economy downhill faster than a mortgage broker could say "Approved!"
Over the past two years, those buzzwords faded as the national conversation focused on the federal deficit and the grim employment picture. But as economists, policy makers, and businesspeople struggle to jump-start economic growth, housing is once again a hot topic.
By most measures, the housing market remains anemic, or worse. The Case-Shiller Home Price Indexes, which track changes in residential real estate prices across the country, showed home prices down nearly X% in August compared with August 2010.
Average home prices nationally have plummeted XX% from their 2006 peak. In some cities, like Naples, Florida, they have fallen as much as XX%. Financial-analytics company Fiserv predicts a further X.X% average national decline by next June, fueled by continued high unemployment and foreclosures.
The plunge in prices means that nearly a quarter of U.S. homeowners are underwater on their mortgages. While foreclosures remain a fairly localized phenomenon, where they hit they hit hard. In Nevada, which leads the nation in foreclosures, banks were foreclosing on X in every XX homes as of the third quarter of this year. California was second, with X in every XX homes in foreclosure, and Arizona ranked third, with X in every XX homes in the foreclosure process.
The collateral damage from housing's woes is huge. Foreclosed homeowners aren't doing much spending, and their underwater neighbors aren't either, even if they are employed and can still afford their mortgage payments. The negative psychological impact of owing more than one's home is worth means that spending is curtailed, mobility is limited, and borrowing against home equity, a common phenomenon during the debt-fueled boom, is not an option. Together with co-author John Quigley, economists Karl Case and Robert Shiller, creators of the Case-Shiller indexes, recently estimated that the decline in home prices from 2005 to 2009 caused consumers to spend $XXX billion less each year than they otherwise would have--an amount equal to nearly X% of annual economic activity.
Indeed, the Federal Reserve Bank has identified housing as one of the economy's most critical issues. "Continued house-price declines could lead to even more defaults, foreclosures, and distress sales, undermining wealth, confidence, and spending," said William Dudley, president of the Federal Reserve Bank of New York, in an October speech at Fordham University. "Breaking this vicious cycle is one of the most pressing issues facing policy makers."
Even for those in resilient real estate markets, such as much of the Northeast or California's Bay Area, news of foreclosures contributes to a feeling of unease and a general lack of confidence that affects both the housing market and the broader economy. "I may be well situated in my housing, but when I read about foreclosures it causes concern," says Marty Connor, CFO at Toll Brothers, the luxury-home builder. "I'm employed, but when I read about X% unemployment, it doesn't make me feel good."
Housing, says Connor, is critical to the economic recovery not only because houses are most people's largest personal asset and their value has such an enormous impact on consumer confidence, but also because of the employment generated by the sector, in direct construction of homes as well as in real estate, home furnishings, mortgage banking, home renovation, and a host of other ancillary services tied to the business of selling houses.
The Ripple Effect
CFOs IN THE HOUSING SECTOR TELL A SIMIlar story. They have survived the worst of the downturn and now maintain a somewhat defensive posture, carefully guarding their balance sheets and protecting the jobs of remaining staffers while waiting--and waiting--for the market to improve.
After a brutal few years in which the company saw its revenues shrink by more than XX% and reduced its employee base by the same amount, Toll Brothers is now at breakeven. The company has shored up its balance sheet, Connor says, and is searching for the right opportunities to put its cash to work. "We think we saw a bottom in housing in the spring of 2009, and all we've done since is bounce along that bottom," says Connor. While the average number of homes built in the United States hovered around X.X million units a year for the past XX years and reached X million in 2005, for the past few years builders have added fewer than XXX,XXX houses each year. "We're so far below the long-term average, it's distressing," Connor says. Toll Brothers will hold on to more cash than ever before so that the business is prepared to ride out the rest of the cycle, however long that may be.
Michael Kreamer, CFO at Marrano/Marc Equity, a builder in western New York State, also expects a long slog. "There's no consumer confidence in the future, so very few people are committing to a big purchase like a house," he says. "That's our biggest problem right now."
Kreamer says the business has held up relatively well, as the region didn't experience the same kind of building boom as much of the rest of the country and thus has had a less dramatic plunge. Nonetheless, the market has slowed in the past year. The company has shifted its product mix toward smaller homes, from an average of X,XXX square feet to X,XXX square feet. "We've moved away from what used to be a 'move-up' product to an entry-level product," he says. "In the past, buyers might have stretched because they had confidence in the future. Now, they're not willing to stretch."
At cabinetmaker American Woodmark, "things are interesting," says Jonathan Wolk, CFO at the company, which sells its products through Home Depot and Lowe's and to smaller stores and large home builders, and reports some $XXX million in annual revenue. After a strong spring in which sales were up over last year by XX%, business began to slow over the summer as the debt-ceiling talks dragged on and consumer confidence dipped, says Wolk. Now, while he expects sales will still be up for the year, he anticipates more-moderate growth.
Tim Wissner, CFO of Windermere Solutions, the technology arm of Windermere Real Estate, a Seattle-based realtor, says he and his fellow executives are looking at data on a very granular level as they try to plan for the lackluster recovery. "We break down Western Washington almost into neighborhoods," he says. At one end of the spectrum, in high-net-worth neighborhoods of Seattle, all-cash deals predominate. At the other end, there is a neighborhood in South Puget Sound where even foreclosed-upon homes aren't moving.
While Wissner says the foreclosure overhang is less of a problem than it was last year, he isn't expecting robust growth in the short-term. "We were originally projecting 2011 as the year the real estate market would stabilize and 2012 as the year it would see growth. We've pushed that back a year," says Wissner. "Until you solve the jobs problem, you will not fix the real estate issue."
Laying a Foundation
WHILE WAITING FOR A BREAK IN THE VICIOUS WEAK-JOBS weak-housing cycle, CFOs in the sector are taking steps to prepare for growth when it eventually returns. At Toll Brothers, Connor says, "we're looking at new land and new opportunities and balancing that with the security of having cash and liquidity for however long we need it." The company has added some new developments and plans to continue to do so.
A bright spot has been the City Living brand, a division that builds luxury condos in New York, New Jersey, and Philadelphia, which has grown to make up more than XX% of the business. "We still have significant success with the right product in the right location," Connor says. He cites a community of luxury homes in the $XXX,XXX range outside Philadelphia where the company has sold nearly XX houses in the past year.
American Woodmark's Wolk and his fellow executives meet regularly to review market data and try to forecast accordingly. "We're trying to determine ways to become more efficient in the event that the market just doesn't want to give us any help for a while," he says. "What we see is that new housing starts are struggling to get back to historical levels," Wolk adds. "We've been flat-lined for a few years now." The company is trying to maintain its current staffing levels by carefully managing schedules at its plants.
At Windermere, the company is taking advantage of the slow market to make a "massive investment" in technology, says Wissner, who has recently left his role as CFO of the corporate entity to head up finance for the technology business, which spun out of the parent company last year. "We are revising all of our platforms and trying to become much more sophisticated about social media and innovation. We're updating and greatly expanding all of the backend tools for our realtors," he says.