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As Home Construction Falls, Builders Feel The Pinch

Housing starts in April were down nearly 25 percent from a year ago, the Commerce Department said.
Paul Sakuma
Housing starts in April were down nearly 25 percent from a year ago, the Commerce Department said.

For homebuilders, it hardly feels like an economic recovery.

Nearly two years after the recession ended, the pace of construction is inching along at less than half the level considered healthy. Single-family-home building, the bulk of the market, has dropped 11 percent in that time. And there's no sign it will improve soon.

Builders are struggling to compete with waves of foreclosures that have forced down prices for previously occupied homes. The weakness is weighing on the economy.

Though new homes represent a small portion of overall sales, they have an outsize impact on the economy: Fewer new homes mean fewer jobs.

'I Might Have To Lay Off My Son'

Skip Howes, a homebuilder in Woodland Park, Colo., has managed to stay in business only after laying off two workers in the past few years. He's now running a two-man operation in the small town outside Colorado Springs. The other man is his son.

But business hasn't improved. Before the housing boom, he built as many as six homes a year. Last year, he built only one. This year, he's had no home projects.

"We've been holding on for years," Howes said. "If I can't diversify, and if things don't improve, I might have to lay off my son."

The Commerce Department said Tuesday that new-home construction plummeted last month to a seasonally adjusted rate of 523,000 homes a year. A big drop in volatile apartment-building construction pulled down the monthly figures. Tornadoes and flooding also disrupted construction projects throughout the South.

David Crowe, the chief economist of the National Association of Homebuilders, says levels are at the lowest on record since the 1940s.

Remarkably, says Crow, "although our population expanded four-fold since the '40s, we aren't building any more new homes than we were in the '40s."

And that's bad news for the whole economy. At the end of most recessions, Crowe explains, housing picks up and usually gives the economy a boost.

"In a recovery, homebuilders hire construction laborers, homebuilders buy appliances, carpets that were made in a plant somewhere else," he says. "And then the people that move into the house buy furniture and window coverings and plantings. And so there's a whole cycle of economic activity that usually stimulates the economy in a recovery that is not taking place on this cycle."

That's because this recession was caused by excessive risk-taking in the housing market and the financial system.

Steve Blitz, a senior economist at ITG Investment Research, says homebuilders just built way too many houses during the bubble. He says the rule of thumb over the years was that building 1 million new homes a year in the U.S. pretty much matched demand. But during the housing bubble, he says, "we were building 2 million homes a year."

The nation's largest homebuilders — including PulteGroup, Lennar, D.R. Horton and KB Home — have survived the turbulent stretch by cutting prices and offering more incentives.

KB Home CEO Jeff Mezger says a new condo development his company is building in Los Angeles is environmentally friendly — and he's hoping that saving 50 percent on utility bills with better insulation and solar power will attract homebuyers to these green building projects.

"We're trying to find ways to differentiate from the existing housing stock, and in an odd way we're making the homes we built five years ago obsolete," he says.

Small and midsized homebuilders haven't been as fortunate. Many small builders are staying in business either by working on a few choice properties or focusing on remodeling and renovation projects.

"Everybody is feeling the pinch," said Greg Ugalde, a midsized homebuilder in Torrington, Conn., who is building a third of the homes he built in years before 2003, when the housing boom began.

A Smaller Pool Of Homebuyers

High unemployment and stricter lending requirement have greatly reduced the number of potential buyers who could qualify for a mortgage. And those who are eligible have more incentive to buy a previously occupied home.

Millions of foreclosures and short sales — when the lender agrees to accept less than what is owed on the mortgage — have lowered prices for existing homes. The median price of a new home was about 34 percent higher in March than the median price for a resale. That's more than twice the markup in healthy housing markets.

In some cities, prices are half of what they were before the housing market collapsed in 2006 and 2007. Many potential buyers who could qualify for loans are worried that prices will fall further. Others are hesitant to put their own homes on the market when prices are dropping.

"There are very few signs of recovery in residential construction," said Celia Chen, senior director at Moody's Analytics. "Absent evidence of stronger demand for housing, homebuilders will remain reticent to put up new homes."

Single-family-home construction, which represents 80 percent of the housing market, has helped lead the country out of past recessions. Each new home built creates an average of three jobs for a year and generates about $90,000 in taxes, according to the National Association of Home Builders.

After the six economic downturns between 1960 and 2001, construction jumped an average of 35 percent in the first 22 months, according to Credit Suisse Securities.

But that hasn't been the case since the Great Recession ended in June 2009. Single-family building actually fell 11 percent in that time.

Some factors are unpredictable, such as harsh weather. Violent tornadoes and flooding along the Mississippi River contributed to a 23 percent drop in building throughout the South, analysts said. Reconstruction efforts might lead to a "bounceback in May," according to Paul Dales, senior U.S. economist at Capital Economics.

Most builders say they don't expect a housing recovery until they see fewer homes in foreclosure and looser credit requirements. In the meantime, Howes, the Colorado homebuilder, said he has broadened his services to include painting, kitchen remodeling and other home improvements to stay in business. Many others are doing the same.

"We need to diversify in order to survive," Howes said. "It's not like it used to be and we need to try new things."

NPR's Chris Arnold contributed to this report, which contains material from The Associated Press

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