Housing Sparked The Recovery, But Now It's Falling Hard

The rows of empty new houses lining Southern California's hillsides easily weathered a June 28 earthquake, the region's worst in 40 years. But just two days later, a jolt of another sort set off shock waves that may be more damaging to the area: Hughes Aircraft Co., which has already laid off 3,000 workers this year, announced that an additional 9,000 will soon get pink slips. For the workers and their families, the news is devastating. For the state's housing industry, it's a disaster.

The sea of "For Sale" signs stretching from San Diego to Hartford tells the story. Even with sunken home prices and low mortgage rates, potential home buyers across the country are sitting on their savings. Scared by an unrelenting wave of layoffs and business failings across the country, they're worried that the economy's tepid recovery is simply too unstable to commit to monthly mortgage payments.

`A BLOODBATH.' To anxious consumers, the news just seems to get worse. On June 29, the same day that the Commerce Dept. reported that new-home sales nationwide fell by 5.6% in May--the fourth straight monthly drop--Aetna Life & Casualty Co. announced that it will slash 4,800 jobs. The next day, Aluminum Co. of America said it would cut 2,100 jobs by the end of the year.

The sudden falloff in home buying (charts) is bad news for an economy that had been counting on an earlier upsurge in the housing market to keep the recovery on track. "There's a bloodbath going on in this industry," says Richard D. Cosner, owner of The Prudential California Realty in Mission Viejo, Calif. Says Dean Crist, an economist with the National Association of Home Builders: "If we are to see home sales pick up, people have to go back to work."

Nowhere is the housing downturn more obvious than in California, which throughout the 1980s accounted for 18% of the nation's home construction. Now, with the state buffeted by layoffs in the defense, banking, and energy industries, sales have slowed to a crawl. In Southern California's San Fernando and Antelope Valleys, new-home sales sank more than 50% in the quarter ended June 30.

The slump in California has helped drag down the entire West, where new-home sales slipped by a staggering 34% in May. But there are pockets of strength in such places as Las Vegas, Boston, and New Jersey. In the Northeast, the Commerce Dept. reports, new-home sales are 20% higher than a year ago. Throughout the country, inexpensively priced homes are moving: Deliveries of prefabricated units jumped 16% this year.

But even in some of the stronger markets there's a dark cloud hovering. In the South, where new-home sales were up by 8.5% in May, skyrocketing lumber prices have cut deeply into the margins of many builders. A 38% hike in lumber prices increased costs of houses built by Colony Homes in Woodstock, Ga., by up to $1,800 each--costs that the company couldn't pass along to nervous buyers.

LAYOFF INSURANCE. All this has led to a fire sale in housing. On June 28, for instance, Palos Verdes Developers Inc. sold all 18 of its Park Plaza Estates townhouses in Torrance, Calif., just down the coast from Hughes. But it did so only by slashing prices by 30% and taking a $2 million loss. Prudential California is resorting to slick marketing. On July 6, it begins offering a form of layoff insurance that provides up to 18 months of mortgage payments to customers who lose their jobs within a year.

But no gimmick in the world can completely overcome fear of the future. Rick and Julie Marini are agonizing about whether to build a new $350,000 house in Milford, Conn. With their home state rocked by defense and insurance industry layoffs, the Marinis worry that their contracting business may stumble. "Are we going to end up not able to afford the mortgage?" frets Julie Marini.

That's also the issue for Ken and Susanna Earnest, who no longer are in the market after spending most of the past year looking for a $200,000 home. The Earnests stopped hunting a month ago, after McDonnell Douglas Corp. had cut 520 jobs at its Huntington Beach, Calif., plant where Ken Earnest works. For now, his $45,000-a-year job is safe. But "it's scary," he says. "I could be next."

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