New home construction still trying to find footing.
The phrase is one that a Federal Reserve economist used in titling his 2007 research, though he agrees it’s now cliché in describing the economy.
A perfect storm.
One local developer described it as “the American dream gone bad.”
Plenty of blame has circulated with the subprime mortgage crisis, in which mortgages were issued to borrowers with poor credit.
Eastern Jackson County has felt the storm’s effects, with one of the Kansas City metropolitan area’s top developers saying “You have to have a plan on how you get out.”
So, how did it all begin?
Just two or three years ago, T.E. Woods Homes employed about 27 people, including superintendents, cleanup crew members and secretaries.
Today, the 35-year home building company employs five people. The remaining 22 employees represent laid-off individuals who lived with their families in Independence, Blue Springs and Grain Valley.
“Most people will tell you I’m one of the lucky ones because I’m still in business,” says founder Tom Woods, laughing, “but I don’t know about that.”
Woods founded the company in 1974 after working as a framing carpenter and brick mason. After 41 years in the building industry, Woods has built nine major subdivisions in the Kansas City metropolitan area, including Prairie Landing and Stone Canyon currently ongoing in Independence.
Ask Woods about the state in the housing and development industry, and he’ll say he considers himself one of the lucky ones.
“We were lucky enough that we had a very solid balance sheet and a lot of equity in projects,” he says. “What has happened is a lot of this is more luck than skill. If you’re the individual builder or developer that was maxed financially – which is not uncommon – and your bank got in trouble, you’re gone.”
Based on single-family residential permits provided by the Home Builders Association of Greater Kansas City, Grain Valley appears to have taken the greatest hit in Eastern Jackson County communities. Grain Valley peaked in 2003 with 160 single-family units for January through April.
Through April 2009, just one single-family unit permit was filed in Grain Valley.
While the numbers have dropped significantly, Grain Valley City Administrator Gary Bradley says the city takes all housing permits into account, including two-family homes, multiplexes and duplexes. In 2008, a total of 37 single-family unit permits were filed in Grain Valley, but Bradley adds that 117 residential units were issued at Bristol Park, the city’s brand-new lifestyle community that features one-, two- and three-bedroom apartment units, as well as a mixed-use development with a coffeehouse, tanning salon and bar and grill.
Grain Valley continues marketing itself as a community at events such as the Greater Kansas City Home Show in March, Bradley says, which aims to help the building community and spur development.
“We’re kind of held hostage by what’s happening in the Kansas City market and the rest of the country. There’s less housing inventory, but there’s more people moving here,” Bradley says. “The new construction just isn’t happening, and that’s probably going to pick up when the rest of the region does. We know that it’s not anything that we’re doing. We’re kind of impacted by the market as a whole. We’re trying to take the steps that we can to minimize the impact.”
Kelly Edmiston, a senior economist in community affairs at the Federal Reserve Bank of Kansas City, co-authored a 2007 paper titled “Rising Foreclosures in the United States: A Perfect Storm.” In summary, Edmiston says three main factors contributed in astronomical residential foreclosures.
First, property values were declining in 2006. Sometimes, people are so under water in their mortgages that they have no other option but walking away, Edmiston says.
“It could be financially beneficial to just walk away, even though it wrecks their credit,” he says. “If property values had continued to go up that wouldn’t have been such a big problem because people could have sold their property to pay off their mortgages. Now that their house is worth less than the mortgages, there’s no options left and they have to go into foreclosure if they can’t make their payments.”
Next came the proliferation of subprime mortgages, with the peak period in 2004-06, Edmiston says. Subprime mortgages are simply home loans made to borrowers with impaired credit. When banks and financial institutions previously made loans, they held the loans within their portfolios, bore the risks associated with the loans and made the payments if someone defaulted, Edmiston says.
“Increasingly over time, the mortgage market has become more mechanized and once a loan was made, it would be packaged together and the loans were sold as securities,” he says. “Once you made a loan, instead of holding it yourself, you would sell it as mortgage-backed securities. That created a lot more money available for lending.”
Lastly, many subprime loans had a fixed rate for two to three years and then the loans switched to an adjustable rate, Edmiston says. With lax underwriting standards, loans were made to people in 2004-06 who were less than credit worthy, he adds.
For developers like Woods, these three factors spelled a recipe for disaster. With increasing foreclosures, more houses become available on the market and home prices are pushed down, Edmiston says.
“The demand for homes is reduced, also, and that’s been aggravated by the downtown in the economy,” Edmiston says. “In my view, there was overbuilding. Property values were going up, and they just built and built and built. There were just more houses out there than people who wanted to buy them.”
So, why not just let the existing inventory run its course in this down economy? That’s not really an option, Woods says.
“That’s taking the right away from people to buy the home they want,” he says. “The reality is, in Independence, there’s very little inventory. On a local basis, we’re sending the customers that would buy houses in Independence and Blue Springs elsewhere.”
In February, President Barack Obama signed the American Recovery and Reinvestment Act, which approved an $8,000 credit – or 10 percent of a home’s value, whichever is less – on first-time homebuyers’ 2008 or 2009 taxes. That’s great, says Bernard Markstein, a senior economist and vice president of economic forecasting and analysis for the National Association of Home Builders, but the NAHB pushed for a larger tax credit that would have applied to all homebuyers, not just first-time buyers.
“Some of it is just going to be time in working off the toxic assets, as they are called,” Markstein says. “If you stabilize home prices, you’re going to stop this downward spiral on defaults and foreclosures. We’ll take what we’ve got, and it has been some help.”
Several senior economists agree that the U.S. economy typically cycles with four consecutive years of steady growth followed with one year of recession. Following the 1982 recession, the U.S. experienced eight to nine years of solid growth, Edmiston says, which was a longer period of growth than typical recessions. Then, a second large growth period followed the 1990-91 recession, he says.
“The recessions in 1991 and 2001 were relatively mild compared to other post-war recessions,” Edmiston says. “We basically had 25 years where there were two recessions and both of them were relatively mild.”
Some economists argue that the economy is finally getting it right, Markstein says.
“Not only do recessions clean out a lot of deadwood, but they also clean out a lot of businesses that would have been good and closed through no fault of their own,” he says. “To some extent, what happened is the argument that you do need an occasional downturn to keep things from getting out of hand.”
According to the National Bureau of Economic Research, a U.S. nonprofit research organization dedicated to studying the science of economics, the U.S. economy has been in a recession since December 2007. The NAHB forecasts that the recession will end by late 2009 or early 2010, Markstein says.
Residential construction has contributed to pulling an economy out of a recession’s reins in the past, Markstein says, and he believes it will play that role again.
“Can the economy do it without homebuilding? Probably, but it will be a smaller recovery. Obviously, who is the most important is the consumer,” he says, adding that homebuilding represents widespread employment, various material industries and local workforce. “Typically, when housing does improve, it goes toward helping the general economy. Can it do it by itself? No, but typically it is a larger player in improving the economy.”