The housing-market sag
One year ago, Michael Sumichrast said there was no possibility of a collapse of the building and real estate market. Today, Mr. Sumichrast, the widely respected chief economist for the National Association of Home Builders, says he is having second thoughts, especially when he looks at the hard numbers that nail together the depressed housing and real estate markets. "I did not see it this bad even in the 1974-75 recession," he said in an interview.
For example, Sumichrast reels off a cord of statistics about as depressing as the stock market in recent weeks. Half a million units lie unsold around the nation, with an average price of $65,000.This represents about $33 billion in housing. He estimates that about 75 percent, or $25 billion, is funded through short-term borrowings at a cost of $7.3 billion annually in interest charges.
At the same time, unemployment in the building industry is running at 17 percent and he expects it will be 22 percent by December. The failure rate of contractors is up 40 percent this year over last year and the failure rate of subcontractors is up 120 percent over last year. Housing starts this year will be at their lowest level since 1946, at just over 1 million units. He estimates that next year won't be much better.
The building industry is not the only segment feeling the crunch. Sumichrast figures there are 5 to 6 million unsold houses for sale right now. In a good year, 4 million homes change hands. Thus, over a year's worth of homes are sale. He says the ratio of listings to sales is 10 to 1. During a normal year, the ratio is 2.5 listings to every sale. "What this means," he explains, "is that if you have to sell your house, you're going to have to dump it."
This crush of homes for sale has so severely depressed the markets that the prices of both houses and real estate are falling quite decisively. According to the Homer Hoyt Institute, a nonprofit organization that keeps tabs on the prices of residential real estate, through the third quarter of this year prices had fallen 1.5 percent nationally.
On a regional basis, the Washington-based institute reports that real estate prices dipped the most -- 8.4 percent -- in the North Central, or industrial belt, region. The South saw finished lot prices drop by 0.7 percent and the West, 0.2 percent. In the Northeast, prices actually rose 0.5 percent.
Real estate activity has subsided even in such normally "hot" areas as Fairfield County, Conn., and Orange County, Calif. Lisa Hartley, a former real estate saleswoman in Norwalk, Conn., says that "prices have really leveled off up here." Until recently, she says, the condominium market was holding up better than the single-family housing market, since the appeal of limited upkeep attracted buyers. Real estate agents report that now the condo market has also hit the floor.
With dismal numbers facing builders and homeowners, it's logical to ask whether there any signs that things will improve next year. According to Mr. Sumichrast, the industry can't count on the savings-and-loans to bail it out now. The S&Ls are concerned with their own survival. Even the All-Savers certificates shouldn't help the thrifts and the real estate industry much, since they only have a one-year maturity. Only the prospect of lower interest rates can help the industry.
This prospect is steadily increasing, says Thomas Harter, chief economist for the Mortgage Bankers Association. He predicts mortgage rates will fall to 15 or 16 percent later this fall as more funds flow into the savings banks and will hit 13 to 14 percent by next June. If rates do fall that far, he says, the second half of 1982 will be good compared with recent years.
Sumichrast likewise believes the industry will recover once interest rates fall. "It's just that this decline is deeper than any before," he concludes, "so it makes it more difficult to see the light at the end of the tunnel."
The slump in the real estate market has not extended to the upper part of the market. At least that's the contention of Claire Martin of Sotheby Parke Bernet's International Realty Corporation. Mr. Martin says buyers of the homes Sotheby's is selling generally are not affected by high interest rates, since they don't take out mortgages anyway. A typical Sotheby offering sells for between $250,000 and $5 million.
There are still some "bargains" in New Jersey, he maintains, where land values have not hit the same levels as Connecticut. He singles out Rumson, in Monmouth County, as a specific undervalued area.