Cost of Living

America is experiencing a serious housing affordability crisis that affects the quality of life of millions of families by locking them out of homeownership or forcing them to make significant financial and personal trade-offs to buy or rent a home.

Just how serious is the problem? The Housing Opportunity Index, which is prepared quarterly by the NAHB and is sponsored by Wells Fargo, measures the percentage of new and existing homes sold nationwide, in that quarter, that would be affordable to families earning the national median income. Between the first quarter of 1992 and the last quarter of 2004, the index ranged from a low of just over 50 to a high of almost 70. Most often, it was in the mid-60s.

However, since the beginning of 2005, the index has consistently ranged below 50 on a nationwide basis, despite near-record low mortgage interest rates. Even more telling are the Housing Opportunity Index readings for individual metropolitan areas. In the Los Angeles/Long Beach/Glendale, Calif., metro area, the index was 2 in the fourth quarter of 2006. And that isn't an isolated case. Many major metro areas, primarily on the West Coast and in parts of the Northeast, consistently record very low affordability numbers.

The result is that millions of families—including crucial public servants such as police officers, firefighters, schoolteachers, and nurses—are priced out of home-ownership. Millions more pay too large a share of their income for housing, are forced to live in housing that does not meet their needs, or must make significant personal trade-offs, such as living far from their jobs, in order to afford housing.

Finding solutions to this multi-faceted problem is a priority for the NAHB, and that's why we recently joined with the NAACP to co-host a roundtable discussion on housing affordability among the nation's major housing organizations.

The NAHB and the NAACP are working together on this issue because members of both organizations understand the importance of housing in families' lives. And now we've broadened the scope of our partnership to include state and local housing authority officials, lenders, real estate professionals, nonprofit housing advocates, and others.

We brought these groups together to figure out how to move housing affordability from a lofty policy discussion to an on-the-ground initiative that makes a difference in people's lives.

We looked at credit issues, land availability, zoning practices, consumer education, and the roles of federal, state, and local government, as well as many other issues during the daylong meeting.

The discussion generated many sound ideas regarding ways we can respond effectively to this challenge. The participants did not see eye-to-eye on every issue, but we found much common ground, and there was broad agreement that we must act collectively to make a meaningful difference.

These housing groups, along with the NAACP, have agreed to conduct a symposium on housing affordability in the fall, bringing even more voices to the table.

The goal is to develop a set of clear, concise policy recommendations that have deep support from a wide range of interests.

Ultimately, the participating groups would deliver them as policy recommendations to the major political parties as they prepare for the 2008 presidential campaigns.

We want to make sure that policy makers at all levels of government are aware of the depth of the housing affordability challenge and put them on notice that the American people expect government to be part of the solution, not part of the problem.

In a similar vein, the NAHB is preparing for its annual Legislative Conference, which will be held June 6, in conjunction with the spring Board of Directors meeting. This annual gathering is the NAHB's way of making sure that the nation's lawmakers understand housing issues and the importance of our industry to the national economy. I encourage you to join us as we meet with legislators on Capitol Hill to discuss immigration reform, housing finance, the environment, tax policy, energy, and other important issues.

Brian C. Catalde, President, NAHB, Washington, D.C.

The NAHB and the International Code Council (ICC) announced last month that the members of the Consensus Committee on the National Green Building Standard have been appointed by the NAHB Research Center Executive Standards Committee. This consensus committee represents the industry in its efforts to develop and publish an American National Standards Institute–approved standard on residential green building. The collaboration between the two groups, announced at the International Builders' Show in Orlando, Fla., in February, reinforced the commitment of the organizations to bring uniformity to sustainable building practices. The consensus committee is made up of more than 40 groups representing a broad spectrum of the industry. Its purpose is to review the working draft of the national standard based on the NAHB's “Model Green Home Building Guidelines” and to develop the ICC/NAHB National Green Building Standard. Unlike the guidelines, which are intended to be used in the construction of one- and two-family homes, the new standard will be applicable to all new-home construction, including multifamily units.

The NAHB recently announced the release of its latest safety product, the Home Builders' Safety Program. This practical guide shows builders how to develop and implement an effective in-house safety program. Available through BuilderBooks, the NAHB's book publishing arm, Home Builders' Safety Program is an invaluable resource that meets builders' needs on multiple fronts, including: providing an overview of jobsite safety and why a safety program is critical to a company's overall success; showing builders how to be in compliance with the Occupational Safety and Health Act, as well as how to respond to an OSHA inspection; and explaining the components of a safety program, including a total-loss program. From fall protection to fire prevention, the Home Builders' Safety Program provides builders with the knowledge to create a safety program that saves lives, enhances the company's reputation, and protects the bottom line.

Four NAHB member developers are winners of the 2007 Building with Trees Awards of Excellence from The National Arbor Day Foundation. Arbor Day Foundation leaders presented the awards at the NAHB National Green Building Conference in St. Louis on March 26. A Better Place Group of Tampa, Fla.; Rhein Medall Communities of Charlotte, N.C.; Carma Colorado of Englewood, Colo.; and the Daniel Island Co. of Charleston, S.C., were honored for protecting and saving existing trees during the development process. A jury of developers and urban forestry professionals selected the winners, paying attention to the projects' creativity and attention to detail. Winners were honored for taking inventory and protecting trees during planning, design, and construction; planting and providing for long-term tree care; demonstrating a commitment to tree protection by including a certified tree-care professional on the development team; and adhering to tree protection goals throughout the construction process.

Soft Landing

An NAHB Research Center study explores builders' expectations for manufacturers in the soft housing market.

During the 2004–2005 housing boom, the U.S. home building industry operated at an unsustainable level. Double-digit annual appreciation rates of homes drew investors into the market, increasing demand and fueling overproduction. Throughout this period, housing industry experts maintained that a necessary market correction to more moderate levels would occur.

Seeing these factors in play, the NAHB Research Center initiated a robust study in late 2006 to explore not only the potential challenges ahead, but also how builder expectations for manufacturers have changed and how that could affect the way they do business. To capture the attitudes of home builders, the Research Center combined qualitative research, a series of national focus groups, and a subsequent nationwide survey of builders—both production and custom. A preview of the study's initial findings was presented during the 2007 International Builders' Show.

According to the study, since the downturn of the market in 2006, home builders have made numerous changes to the way they operate. Key input from builders centered on how their expectations for product manufacturers have changed and the effects of the new climate on material usage and selection; adjustments in internal operations and purchasing decisions; interest in product innovation; and their reactions to the shifting expectations of home buyers.

Housing economy experts estimate the current home building climate is likely to continue throughout 2007, with a very gradual rebound expected as we move toward 2008. Accordingly, the study suggests that manufacturers who understand the market fluctuations and act quickly to make adjustments to their product, distribution, marketing, and sales strategies can see short-term sales improvements and be better positioned for the housing market rebound.

The full report, “Implications of the Soft Housing Market for Suppliers of Building Products,” will be available for purchase from the Research Center in June.

For more information on this internally funded Research Center study and its availability, call 800-638-8556 or visit www.nahbrc.org.

Bad to Worse

The subprime mess is threatening the housing recovery.

In my column last month (“Lax Lending,” April, page 70), I discussed the relaxation of mortgage lending standards that fueled the unsustainable housing boom of 2004–2005, the snapback of lending standards that began late last year, and the threats posed by tightening standards to the NAHB's projected housing recovery in 2007–2008.

The situation in mortgage markets has severely worsened during the past month as the subprime mortgage sector has virtually melted down and other parts of the mortgage lending structure have felt the intense heat. The NAHB's surveys of single-family home builders already show significant negative impact on new-home sales, and the outlook for the balance of this year and 2008 has become worse because of evolving mortgage market conditions.

Delinquency rates on subprime mortgages moved up substantially late last year and further deterioration of loan quality is inevitable—particularly for sub-prime ARMs. Many of these loans not only were made to high-risk borrowers, but also contained risk-layering loan features, such as “piggy-back” seconds, along with the absence of documentation of borrower income, assets, or debt burden.

Very large numbers of high-risk sub-prime ARMs were made in 2005–2006, and these loans generally had fixed-payment periods of only two years. Thus, a major wave of interest-rate and monthly-payment resets are welling up at this time and will crest later this year and in 2008. There's no doubt that delinquencies, defaults, and foreclosures on this book of business will rise substantially from already elevated levels. Indeed, lenders, regulators, and securities market participants now understand the dark side of the subprime-lending boom. As a result, standards for new loans already have tightened considerably.

The NAHB surveyed more than 400 single-family home builders in March in order to get a handle on the early impacts of the subprime meltdown on home sales. One-third of all builders in our survey said that tightening lending standards had taken a toll on their home sales in the early part of 2007. For those impacted, the median loss was an estimated 10 percent of sales volume.

Our survey also showed that big builders, as a group, had been more dependent on subprime mortgage financing than small companies, and relatively high proportions of big companies said that tighter mortgage lending standards had taken a toll on their sales volume early this year.

Two-thirds of builders in a supplementary sample of 44 very large companies (those in the BUILDER 100 and Next 100) said they have finance subsidiaries that offered subprime loans to their buyers, and those without finance subs generally referred subprime borrowers to mortgage bankers, mortgage brokers, or commercial banks. Not surprisingly, a large majority of companies in this sample (84 percent) said that tightening mortgage lending standards had taken a toll on their sales early this year.

The subprime-related tightening of mortgage lending standards has prompted significant downward revisions to the NAHB's forecasts of home sales and housing starts for the balance of this year and in 2008. We're still showing a modest recovery process, beginning around the middle of this year, although projected housing starts remain well below our estimate of the sustainable trend level of production. In these terms, the major “correction” process that began in the fall of 2005 will extend at least through 2008.

It's fair to say that the range of uncertainty around the NAHB's recently revised baseline (most probable) housing forecast is quite wide. Indeed, the key downside risks to the overall economic outlook now reside in the mortgage and housing markets—a point made on March 28 by Federal Reserve Chairman Bernanke in testimony before Congress.

David F. Seiders, Chief Economist, NAHB Washington, D.C.