By
Evan Newmark
It’s one of my favorite truisms that you can never be too cynical about Wall Street or Washington.
But after watching Bob Toll, CEO of Toll Brothers on CNBC this Monday, I’ll be adding home builders to that esteemed list.
Every CEO talks his own book, but few do it like the home builder CEOs.
On CNBC, Toll was at it again, exhorting the Fed to keep pumping billions into housing because new home construction “employs through direct and corollary basis about 20-25% of all the jobs in the country.”
That’s right. Bob Toll apparently thinks 30 million Americans derive their daily wage from the home building industry.
But here’s the thing. Bob Toll is wrong. That number is wrong. And our nation’s ongoing obsession with new home construction is also wrong.
It’s time for America to find itself a new economy.
Now, I’m not saying that housing doesn’t matter to the economy. It matters a lot. Home prices keep everything from bank balance sheets to consumer confidence afloat. Without the TARP or the Fed tossing us a $1.25 trillion mortgage life raft, we’d all be drowning right now.
But building new homes is a different matter. Yes, it can quickly create jobs, wages and profits, but it can just as quickly take them away. Just ask the residents of Las Vegas or South Florida.
I was curious to see just how “essential” homebuilding was to the current U.S. economy, so I did a little homework with government figures and the excellent Calculated Risk blog And here’s what I found:
Currently U.S. GDP stands at around $14.5 trillion, yet residential construction spending accounts for only a measly $270 billion.
According to the Bureau of Economic Analysis, just 2.5% of GDP in 2009 was directly attributable to homebuilding (defined as “residential gross private domestic investment”). Even in the subprime glory days of early 2006, that figure never went above 8% of GDP.
So how does Bob Toll attribute a quarter of all American jobs to homebuilding?
Even if I threw in every mortgage broker and Home Depot checkout clerk with a generous definition of a “direct and corollary” job, I can’t get there.
Toll’s comment reminds me of the “millions of Midwest jobs” that our nation would supposedly lose if Detroit went belly-up. If I was from the Midwest, I may have actually believed it.
But the old ways of thinking about the U.S. economy die hard.
Even here at the WSJ, we play up every new release of “new home starts” and “permits for new construction.” And Wall Street still picks through the words of homebuilder CEOs like Bob Toll and Ara Hovnanian like tea leaves.
But real estate speculation – and by extension home construction – are no longer at the center of our economy. At $16 billion, the combined market cap of the top five U.S. homebuilders is less than the
market cap of Adobe Systems. And that’s a good thing.
The U.S. economy is in transition, reconstituting itself into something that isn’t yet clear. But here’s what is clear: we just don’t need many new homes.
Consider the following. The U.S. has about 131 million housing units (homes, apartments, the works). Of that only 112 million are occupied. That means 19 million or a staggering 14.5% of all available housing is empty.
Yes, there are homes in cities like Detroit that no one will ever want. And yes, only 2.1 million of the vacant properties (1.6% of the total) are “officially” for sale.
But the 2.1 million “for sale” figure is severely understated. There are another 7.8 million U.S. households who are either behind on their mortgage payments or in foreclosure. Several million of those homes will be on the market soon enough.
It seems that the only Americans who really need more new houses are the American home builders.
New home sales in January fell to an annual run rate of 309,000 units. That’s off almost 80% from its peak in 2005 and 2006. Even if new home sales are now flattening out, the prospects of a sudden big rebound seem close to nil. There’s simply too much supply.
And that’s why Bob Toll goes on CNBC and why he and his fellow home builders will continue to push for first time homebuyer credits and for Fannie, Freddie and the FHA to churn out the mortgages.
The real estate bust of the past few years may have brought America to the brink. But to the homebuilders, we’re just now coming to the end of a very bad cycle in a notoriously cyclical business.
Just check out page 38 of a recent Toll Brothers investor presentation announcing “Record Housing Demand Projected for the Next Ten Years” and you’ll see exactly what I mean.
For Bob Toll and the rest of our nation’s home builders, the spring selling season is just around the corner! America will always need more homes – especially when the U.S. taxpayer is footing much of the bill.
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