Monthly Archives: December 2008

A lump of coal

Christmas Eve came with a lump of coal for homebuilders.

A December 24th story reported by the Associated Press announced that November home starts dropped by almost 19%, much worse than already-dire projections and the steepest decline since March, 1984. Not only is the decline percentage at record levels, the number of housing starts and permits are also at “all-time lows, breaking records that were set last month.”

According to Market Watch, the November drop puts the seasonally adjusted annual rate of new starts at 625,000, which is “the lowest since the Commerce Department began keeping records in 1959. According to similar records kept elsewhere, it’s the slowest pace of construction in the post-World War II period.”

If you pull out the numbers on just single-family home starts, the news is similarly bad. The November drop was 16.9%, bringing the annual start rate down to 441,000. Another record.

“It is going to be a very cold winter indeed for homebuilders,” Joshua Shapiro, chief U.S. economist for forecasting firm MFR Inc., wrote in a note to clients Monday.

Ouch!

What’s there to celebrate with news like this? Well, not much, I suppose. I’m especially concerned about the job losses affecting so many in the homebuilding industry. Of course, this massive decline in housing starts is also creating its own debilitating affect on the overall economy. In better years there is typically 1.2 to 1.5 million housing starts, which has led to an annual positive economic impact, often exceeding $700 billion.

Therefore, with the news delivered on Christmas Eve, it’s not just the homebuilders who got a coal in their stockings; there were coals aplenty because the “trickledown theory” works fastest in the negative.

Is there a silver lining here?

Here’s one. The homebuilding process is notoriously backward and its practitioners are not prone to accept criticism or invite change. The industry and its leaders don’t tend to be self-critical or introspective. “We do what we do and that’s the way it is,” comes across as explanation of the past, forecast for the future and excuse for anything that’s wrong. The subconscious rationalizations might also have sounded like this: “You can tell by how busy we are that we’re doing things right. We may not be perfect, but you obviously need us.”

Well, the homebuilding industry is demonstrably not busy, so the good news is that homebuilders across the country are sitting around with time on their hands. Perhaps they will use this unintended furlough to think, read and reflect. Perhaps they will even be thinking about realigning our industry to more purposely serve the common good. Perhaps many will even come to believe that our industry must summon the will to build homes that are more durable, more energy-efficient, more beautiful, and more affordable.

I know it sounds farfetched, but I can’t help but dream for an industry awakening. It’s long overdue

New leadership for HUD

Who knew the place we count on for security and comfort—our refuge from life’s daily stresses and struggles—could itself be the eye of a nightmarish storm? For millions of Americans, the purchase of a home was also their financial Waterloo, and for the entire global economy, American housing will long be synonymous with classic swindles, financial tragedies and economic black holes. Unraveling this mess and shoring up our still free-falling economy will also mean restoring the real meaning and value of house and home.
shaun donovanThe good news is that Barack Obama seems to understand exactly that point, and has chosen an apparently excellent candidate to lead the effort. In announcing his choice for Secretary of Housing and Urban Development (HUD), Shaun Donovan, he succinctly defined both the problem and his proposed tack toward a solution:

“To end this economic crisis, we must end the mortgage crisis where it began. This all started when Americans took out mortgages they couldn’t afford. Some were reckless, aware of the risks they were accepting, but many were innocent, tricked by lenders out to make a quick buck. With banks creating securities they could not value, and regulators looking the other way, the problem began infecting the whole economy, leading to the crisis we’re now facing.

It not only shakes the foundation of our economy, but the foundation of the American Dream. There is nothing more fundamental than having a home to call your own. It’s not just a place to live or raise your children or return after a hard day’s work — it’s the cornerstone of a family’s financial security.”

There is some lively debate about the merits of bailing out homeowners whose objectives were greedy or who should have been a lot more prudent. But the sins of these homebuyers pale in comparison to those of the lending agencies and the homebuilders, who knew they had stirred up a poison, but hoped—against the truth of 7th grade math—that the numbers of survivors would sufficiently exceed the numbers of victims. As I said in an earlier post, the greatest of crimes in this story was in the mixing of the Kool-Aid and offering the drink, not in accepting it. Therefore, it is unfortunate that the bailout has gone this far without offering a rescue path to the 1.5 million more homeowners now facing personal financial ruin. It looks as if Obama intends to change that:

“To stem the rising tide of foreclosures and strengthen our economy, I’ve asked my economic team to develop a bold plan that will dramatically increase the number of families who can stay in their homes.”

Along with the rest of the Obama’s economic brain trust, it is clear that dealing with the foreclosures would be one of the most important issues on Shaun Donovan’s plate as the Secretary of HUD (assuming he is confirmed by the Senate). An architect by training, he has most recently been the head of New York’s Housing Preservation and Development Department and already has a reputation for helping to prevent low-income foreclosures and developing low-income housing. He appears to be an excellent selection to lead HUD, but like everybody coming in with Obama to clean up this multi-faceted mess, he’ll need to rise like crazy to the nearly impossible looking situation. I do think it’s critical that Obama’s leaders and advisors include a person who will champion for homeowners and homeownership.

In promoting Donovan, Obama also acknowledged that HUD hasn’t always lived up to its mission and appears that he will expect change and improvement in the Housing Department, too.

“Since its founding, HUD has been dedicated to tearing down barriers in access to affordable housing — in an effort to make America more equal and more just. Too often, these efforts have had mixed results.”

HUD was founded in the civil rights era and therefore was intended to focus on developing initiatives and incentives to increase access to decent housing, particularly for minorities. Nothing could be more important. Its genesis was a high-minded, humanitarian mandate, but its four decade history is also about the loss of the original focus and the downward fate born of continual capitulation and compromise. It’s what happens when “low-income” and “affordable” become the excuse for just plain bad, as if the poor can somehow afford less energy efficiency, lower quality structures and worse investments. It’s a common, predictable refrain in which HUD should be the obstinate objector, but instead tends to help define the shoddy bottom. If you want to know just how bad things are allowed to be, HUD-code (manufactured homes) has the claim to that. They are shacks. In their urban programs, they have sometimes fostered the conditions for slums and unlivable tenements. In a 2006 article in The Village Voice, HUD was called “New York City’s worst landlord.”

So, as the head of HUD, Donovan would have both complex challenges and low fruit, but it’s all about how important affordable, good quality homes are to all of us. If we are a great nation, we have to prove it with our housing. To rephrase Churchill, how we live becomes who we are, and who we are becomes how we live. We need to change the perceived need for extravagance beyond our means on one side, while also creating methods that can provide for real needs within minimal means on the other. We can do it. We need new leadership and new creativity, but mostly there needs to be the simple resolve to get it right and no Plan B: we must put America’s housing on a better, more sustainable track. I hope the Obama-Donovan team will be up to the task.

The visible hand

One of the benefits of blogging is in the comments and feedback from readers. I very much appreciate hearing from you. Several of my favorite reader comments have come from Joseph Martini. He doesn’t always agree, but he is thoughtful, and thought-provoking. He took issue with my last entry, More snow in July, and while I was contemplating getting back to him, I discovered he has his own blog, called Give ‘n Go, in which he also posted his response to my thoughts. That inspired me to give him a response in kind, which I’m also posting here:

It would be absurd to get into a tit-for-tat about what Adam Smith meant for his time or contemplated for the future. Still, I will stick to my presumption that he couldn’t imagine the effects of the perfect storm of greed we are currently witnessing.

You nearly make my point again when you say this about Adam Smith’s philosophy:

He made it very clear that considerable structure was needed before the invisible hand of the market could work efficiently.

For example, property rights must be strong, and there must be widespread adherence to moral norms, such as prohibitions against theft and misrepresentation.

Smith understood that “considerable structure was needed,” but “widespread adherence to moral norms” is not structure; it’s an assumption about how people will behave in their social and economic relationships. He suggests that there will be a natural amelioration of greed and self-interest as one learns that the common good is a critical aspect of one’s own self-interest. If this no longer happens in a natural way, it is probably fair to assume that a more specific “structure is needed.”

We also have to remember that Adam Smith’s influences and references involved much, much more physical labor and human contact than trade relationships often do these days. In their barter-oriented economy, people learned that their personal gains were greatly dependent on their trade and interactions with others. Too much taking would be inherently self-defeating.

I don’t think Smith had any conception of the something-for-nothing mentality that is all too common now. It’s a malaise that has infected all social strata and all economic sectors, from the hedge fund managers to minimum wage service employees. Free wealth is alluring, but it’s becoming obvious that it’s a nasty trap: a pot of gold on the other side of a sinkhole.

I also don’t think this is anything like a normal “boom/bust cycle.” I’ve built my business on an understanding of seasons and cycles. I know that winters come with regularity, as do economic downturns. We therefore studiously avoid growth in response to what we see in the summer months or boom times. These ebbs and flows are natural and healthy and it is foolish to fight against them in an attempt to make things always good for our particular industry. The greater good is more important. Thus, I proposed the analogy of the ski industry possibly wanting “snow in July.” If it could be granted, the results would be disastrous, even if the ski industry had a short-term boon.

This is one of the reasons I blame the NAHB. If they were advocating for their constituents, they failed quite badly. They know about ebbs and flows in the housing industry. They study it and have the numbers, graphs and charts going back decades to reflect on as a reminder. They also knew that the sub-prime type loans were a big problem. Yet they did nothing. Their knowledge and expertise also comes with responsibility, much like that of medical doctors. It’s as if they looked at the effects of a growth hormone, saw a cancer starting to grow, but simply ignored it, perhaps hoping the growth would outpace the disease. Or…what were they thinking?

This massive economic tragedy isn’t a part of any cycle we should accept. To the dismay of many, one obvious conclusion is that it turns out we can’t trust ourselves. Left to our unfettered inclinations, our penchant for free wealth leads us over even the cliffs we can see. We apparently need a hand to stop this insanity, and to be effective, it most certainly won’t be invisible.

More snow in July

I reported recently about Duo Dickinson’s editorial, in which he argued that the architectural profession should have played a larger role in warning “against the rip-off” as the housing bubble inflated beyond reason. I agree that architects should have done more, but if we’re pointing fingers in retrospect at those who should-have-known and should-have-warned about the impending housing debacle, I’d start with the National Association of Home Builders (NAHB). They knew about the inflated values. They knew about the dangers of the risky mortgages. But while homebuilders were setting housing start records in those unnatural and perilous conditions, instead of sounding alarms, they were a chorus of celebration. They expressed their “concerns,” but in reality it was their dreams come true.

In January of 2005, David F. Seiders, NAHB’s chief economist, wrote a cheery article in Nation’s Building News (NBN), the online weekly newspaper of the Association.

“The housing sector turned in a great performance in 2004, thanks largely to the stunning behavior of long-term interest rates as well as to deepening discounts of initial rates on adjustable-rate mortgages by lenders. New records were set for home sales and single-family housing starts as well as for sales of condo units in multifamily housing, and the rental housing market performed reasonably well in the face of record-high vacancy rates.” (Italics mine.)

In fact, 2004 had been a record year, so the real concern was whether the growth potential for housing had topped out. Seiders wanted to assure his hungry builders there was room for even more growth. In his own words:

“The U.S. homeownership rate hit an estimated 69% in 2004, easily a new annual record… The dramatic performance of recent years moved the U.S. homeownership rate toward the top of the list of countries around the world, prompting speculation that the U.S. rate has approached some sort of natural limit.

But there’s still plenty of potential for rising homeownership in this country, public policy is focusing upon some glaring differences across income classes as well as racial/ethnic groups, and structural changes in the mortgage market have extended the reach of homeownership to more marginal buyers. Thus, it appears that builders of single-family homes and condo units can look forward to a dominant share of the housing pie for some time to come…” (Italics mine.)

In other words, if we’re going to build more homes, we need a larger homeownership rate and to increase homeownership we ought to find a way to open up the “American Dream” to those who currently can’t afford it. (The cynic in me rises up when self-serving intentions are attempting to masquerade as benevolence.) To give these poor people the opportunity to own a home, all we need are “structural changes” to mortgages.

Well, they got those “structural changes” alright and only a few months later, in the spring of 2005, at the NAHB Construction Forecast Conference, it was obvious they already understood that creative mortgages were a double-edged sword. The speakers recognized the potential looming problems of the sub-prime mortgages with clarity. One of the speakers was Thomas Lawler, an expert in risk policy from Fannie Mae. Here’s how his comments were summarized in NBN:

“One area of special concern on the financing scene, Lawler indicated, is a shift of sub-prime borrowers away from FHA mortgages to adjustable-rate loans. There were $600 billion in sub-prime originations last year, he said, and the vast majority of them — 66% — were in two-year ARMs.”

“Two-thirds of sub-prime mortgages — which go to borrowers with lower credit scores, less history managing money and less stable incomes — will be reset between now and 2006, he said. ‘If the Fed stopped raising interest rates today, the vast majority of these loans go up 200 basis points.’” (Italics mine.)

That’s a pretty cogent description of a tidal wave of defaults visible on the horizon. These guys were smart and prescient. The Building News article about this noteworthy conference continues:

“They did find… cause for concern over the sustainability of the boom that is occurring largely in parts of the East and West Coasts and worrisome indications that lower-end buyers have been disproportionately taking out adjustable-rate mortgages that expose them to interest rate risks they may not be able to handle.”

It therefore appears that in January, the brain-trust of the NAHB was pulling for sub-prime mortgages to be the ingenious mechanism that would help them sell homes to people who couldn’t afford them, which was basically the only sector left after back-to-back record breaking years of housing starts. To continue the growth, these guys wanted the “snow in July” I analogized in my last blog entry. It wasn’t natural and it wasn’t sustainable. And they very clearly knew it. Still, at the moment, it was excellent for business. At that moment.

After the perfunctory worrying about reality was over, here’s how the NAHB’s David Seiders summarized the situation at the May 2005 conference.

“Home Sales activity has easily been hitting records. Just basically, it’s been wow—up, up and away.”

“Wow” is an apt word for what happened. And it had only had a brief additional fling with the word “up;” thereafter, it created the most precipitous freefall in the modern history of homebuilding.
Home Starts
Ref: NAHB website, 11/19/2008

The mission of the NAHB is to “enhance the climate for housing and the building industry,” and to “promote policies that will keep housing a national priority.” It is now quite obvious that this single-minded, self-serving, short-termed, greed-induced agenda that makes the common economic and social good secondary considerations, borders on criminal behavior when you are the public voice of 235,000 members and 80% of the nation’s homebuilders. The NAHB has considerable clout, which can be used for good or ill. They chose poorly.

In early 2005, the little-understood magic mortgage potion appeared to be so good for NAHB’s homebuilders that it seemed worth offering that tempting elixir to even more homebuyers, even though the NAHB economists precisely understood its potential as a poison time-bomb. The thinking was nearly this sick: “Here, drink this. It will provide profits for us this year and happiness for you, at least for awhile.” Walking away, the purveyors of the drink-fest confide amongst themselves that they know it might also cause a massive outbreak of cholera in two years, but drop the conversation because it was dampening their euphoria. So they party-on knowing that “when,” not “if,” things go wrong, it will be the fault of those who were dumb enough to accept the free happy-potion being passed around in their gala of denial.

The fact is that the growth of the homebuilding sector had indeed reached its “natural limit,” probably somewhere in 2002 or 2003. More growth required defying natural seasons and cycles by denying common sense and basic math. Economist Adam Smith didn’t contemplate conscious, rationalized idiocy on such a large scale; his “invisible hand” was no match for such a massive, wanton snow job.

Snow in July

If they could, no doubt the National Ski Areas Association (NSAA) would lobby the supreme powers for snow in July. More winter would be good for business. Winter all year would be even better. If they could, they would; that’s what most organizations tend to do. They promote their self-interests without regard for larger public interests. What matters is what’s good for them, today. Under the sanctified umbrella of a larger group—acronym and all—somehow positions that would be viewed in an individual as selfish and narrow-minded morph into collective righteous causes. Baseball? Boating? Swimming? Not our problem. You can hear them proudly pronouncing: “We’ve done our research and we’re very sure that snow in July would make for a better world.” It’s easy to imagine they’d even believe it.

The problem with special interest organizations is that they get all tangled up in themselves, lose perspective, eventually become dead wrong, and often do harmful things with their accumulated influence. I do not believe the people involved have perverse intentions, but what is true and right can become groundless shifting sands when the primary purpose of the organization is to support and promote that which (they think) most benefits its membership.

As an example: The American Automobile Association (AAA) has over 46 million members (second only to the Catholic Church), nearly all of whom joined for the roadside assistance and travel services, not to support their not-so-public lobbying efforts. Yet the mission of AAA since 1902 has been to give cars and car manufacturers clout and they do so with zeal and sometimes recklessness. “For the most part, on the big ticket issues, AAA and the Center for Auto Safety are on opposite sides,” says Clarence Ditlow, executive director of the Washington, D.C.-based auto safety group, a nonprofit consumer organization. They’ve lobbied against the Clean Air Act, against every automobile pollution control effort and lobbied against the airbag law. You sign up for more worry-free travel, but you get your personal investment in pollution and highway carnage.

Now, for today’s villain: The National Association of Home Builders (NAHB) has won another important battle. It helped defeat a proposal to raise the energy efficiency requirements of the International Energy Conservation Code (IECC) and the International Residential Code (IRC). This story was reported in the November issue of Energy Design Update by outgoing editor Martin Holladay.* The proposal was affectionately called the “thirty percent solution” because it combined a number of easily and inexpensively implemented improvements to reduce energy consumption in new homes by thirty percent.

While thirty percent may seem like a lot, it’s important to understand the current regulations are pretty much on the floor. They allow the typical home to be a virtual energy sieve and a severe economic burden for homeowners when energy costs rise to reflect their real value. The millions of homes built to these standards are also a huge barrier to achieving energy independence as a country. One of our biggest problems today is to find a way to upgrade the energy performance of the existing housing stock. The answer isn’t easy because the problem is deep in the bones of the buildings, hidden between the exterior and the interior finishes. What’s usually in there—stuffed between the framing members—is loosely fitted fiberglass insulation and a tangle of wires, electrical boxes and sometimes even plumbing and heating pipes. The result is a typically abysmal level of energy efficiency and a conundrum: to fix the homes, you have to nearly demolish the interior or exterior and what’s left at that point begs the question of whether it’s worth the cost. Often it’s not.

While we wrestle with this vexing issue, the least we can do is to raise the bar for new homes, which is precisely what the “thirty percent solution” proposed to do. It was a plan endorsed by the US Department of Energy, the US Conference of Mayors, the American Council for an Energy Efficient Economy (ACEE) and the Natural Resources Defense Council and many others. But the NAHB opposed it and used their huge influence to defeat it. In their view, it was too expensive for homeowners, difficult to achieve and an oversight hassle for code officials. This is wrongheaded. The NAHB should be helping its members find ways to build better homes, not using their muscle to ensure that builders can continue to be sloppy and ignorant.

The proposal they defeated primarily focused on modest increases in R-value, more stringent requirements for air barriers and that ductwork be installed within the thermal envelope or improved (no leaks!) and inspected. These are all things we learned in 1978 and have been a part of better building practice for many of us since. The biggest issue isn’t the expense; it’s the problem of teaching people how to build better. It’s like the difference between measuring and cutting to ¼ inch vs.1/16 inch. It takes exactly the same number of steps and the same amount of effort, but the result is dramatically different. In the same way, the “thirty percent solution” only asked that builders do things right and that code officials see that they do. It’s not harder, but it does require the equivalent of cutting to a finer line. It requires only that you know what you’re doing and that you care. The small cost increases would be more than offset by the energy savings, making the consumer, the environment and national security all winners in the bargain.

When I was a young builder in the early 1970s, I joined the NAHB with a sense of pride. I thought joining the “club” was a way of signaling my legitimacy and hoped it would also provide me with support and guidance in my new business. I quickly learned that the NAHB provided more support for the largest builders and were therefore far more concerned about quantity of homes built rather than their quality. Still, I remained a member, hoping to find something through their publications and research that would be of use. In the early 1980s, I discovered that they were fighting against changes in the code that were intended to improve the safety of stairs. The allowable standard at the time was an 8 ¼ inch riser and a 9 inch tread, but studies showed that there were too many stair accidents with that configuration. (Stairs are the most dangerous place in the house. There are literally tens of thousands of falls and thousands of fatalities that happen every year as people are navigating the stairs in their own homes!) Therefore, there were proposals to reduce the riser height to 7.5 inches and the tread width to 10 inches. It made sense to me, but I was shocked to discover that the NAHB was fighting against the change. Their argument wasn’t sophisticated; it was patently selfish, but was couched in terms that sounded like they were fighting for the consumer: It would eat up floor space. Stairs would cost more. Homes would cost more. Fewer people could afford the dream of owning their own home.

It was hogwash. I wrote futile letters in protest, but eventually just cancelled my membership. This kind of negative effort is shameful. How could an association made up of homebuilders use its resources to fight against safety improvements in homes? There’s no reasonable excuse. It beggars belief.

From the EDU report, we now know they will fight with equal determination to prevent improvements in energy efficiency. What’s next? They will apparently fight for anything that makes it easier for their member-builders to put up low quality buildings with the least amount of structural, energy or safety requirements.

Despite the NAHB efforts, eventually building codes do get more rigorous and stringent. Structural improvements get enforced after earthquakes, hurricanes and other natural events prove the existing standards are inadequate. Energy efficiency improvements will come about when the cost of energy is unaffordable, perhaps when people start freezing to death in their homes. Safety improvements will finally happen after enough people have died in preventable accidents. Structural improvements happen after enough homes have been destroyed by one natural event or another. The phrases for every code improvement seem to need the names of disastrous events or multiple human tragedies attached to them. Things get better, but it always comes the slow, hard, painful way because progress is consistently retarded by the diligent, resourceful efforts of the NAHB minions to keep padding the floor instead of raising the bar.

Unfortunately, the NAHB is winning for now. All these years later, the stairs are not safer and energy efficiency isn’t better. And the code minimums are always the maximums for the average American home. A higher performing, safer house is what people deserve for their investment, but they’ll continue to get far less because the battles being fought by the considerable lobbying weight of the NAHB, in defiance of conscience and common sense, are systematically killing a once-proud industry.

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*Energy Design Update (EDU) has long been one of my top sources for up-to-date information from the frontlines of efforts to improve energy efficiency in housing. EDU is quick to report about new systems and products, but it is equally quick to debunk overzealous marketing claims. Martin Holladay will be missed. I always looked forward to reading his reports, as they were typically carefully researched and objective, but came with a refreshing tinge of impatience. As much as anyone, Martin knows that dramatically improving the energy performance of our housing is as easy as making it a priority; there are no technical or economic barriers.