The Mean Economy: For housing industry, a fast fall and a slow rebound

Last in a series

DOWNINGTOWN, Pa. — Joseph Carr and his family know the ups and downs of the housing market well. They’ve lived it for the past five years.

First, there was the frenzy of developers building new homes and properties in the mid-2000s, when seemingly everyone and his brother was buying houses and trying to flip them for a profit.

“The housing market was booming. There was all kinds of work,” recalled Mr. Carr, 41, a longtime plumber and pipefitter. “But it was crazy. I knew something had to give.”

He and his wife, Anna Sofia Santo, 39, a paralegal who at the time was working at Wachovia Bank, tried to steer clear of the madding crowds bidding up the price of homes and financing them with risky, unsound mortgages.

They bought a modest, rundown home in foreclosure here in the country outside Philadelphia and fixed it up themselves, leaving them with only a small mortgage of $1,200 a month and still have money to save and spend on their two young children.

That turned out to be a smart move — so smart, in fact, that it probably saved the family from severe hardship when the big bust hit in October 2008. Both of the Carrs lost their jobs within a matter of months, along with millions of others across the country, as the housing and financial markets collapsed in the worst debt and financial crisis since the Great Depression.

For about six months they had no income other than unemployment benefits of a little more than $1,000 a month to pay the bills. They got by on sheer grit, living frugally until one of the 526 resumes Mrs. Santo sent out finally paid off and landed her a new job with the J.G. Wentworth Co. — making about $10,000 less than her Wachovia salary of $60,000 a year.

The 2008 crisis was just the beginning of the most trying time in modern history, both for the Carr family and the U.S. housing market. Mr. Carr fell in and out of unemployment three times over the course of three years, the first time when Erickson, a major developer of retirement communities, suspended work midway through a 14-unit project it was building locally as it plummeted toward bankruptcy.

Mr. Carr’s employer, Worth & Co., an Erickson subcontractor, slashed its staff from around 400 to 90 in three rounds of layoffs. Mr. Carr saw long-time colleagues who had worked there and at other companies for 20 years or more suddenly pushed out of work and left without pensions or health care. Some of them remain idle without good job prospects to this day.

Before landing safely at Wentworth, Mrs. Santo was jobless for a year and a half after living through the horror of watching her employer Wachovia, once one of the biggest and most respected U.S. banks, get consumed by its huge portfolio of risky mortgages. Federal regulators approved a deal in the fall of 2008 to fold the bank into the West Coast giant Wells Fargo to avert a spectacular failure.

“It was scary as hell,” said Mrs. Santo, and only got scarier months later when, ensconced in her new job at Wentworth, Mrs. Santo got pregnant just as Mr. Carr was getting laid off one of his jobs. She worried about how they would finance her six weeks of unpaid maternity leave and growing family.

“I was pregnant, emotional, hormonal,” she said. “I thought we would never have any security.” The anxiety and frustration led to tension and fights within the family, compounding the hard times.

But Mr. Carr said he knew he could tough it out. He’d already had a hard life. His mother died when he was only 4 years old, and he moved out on his own when he was only 17.

“I’ve been dealing with adversity my whole life,” he said.

With his in-demand skills of an experienced plumber, Mr. Carr was able to find odd jobs installing toilets and fixing leaks by advertising on Craigslist, and took on whatever work was available through a friend in the construction business, remodeling beach properties in Ocean City, New Jersey.

For a year or two, Mr. Carr cared for the children while his wife worked, including doing the lion’s share of caring for the baby Olivia after she was born last year. During that time, he developed his love of cooking. Because of his ample skills in the kitchen, he continues to be the household’s main chef, preparing family meals after he gets home from work each day.

“I feel like I’m good with the kids,” he said, but it was trying at times when he was out of work.

The couple had lived comfortably together before the recession without getting married. But they decided to tie the knot in 2010 so Mr. Carr could get health benefits through his wife’s plan at Wentworth, which already covered the children. Health care proved to be one of their biggest worries during their periods of joblessness.

At those times, they had to do without insurance as it would have taken nearly all of their unemployment benefit checks just to pay for a family policy.

Then a year ago, Mr. Carr found a new job with Madsen, a local plumbing contractor, after accepting a pay cut of $7 from the $32 an hour he made on his last steady job. It could have been worse. He was offered positions making one-third of his former salary.

Stability returns

Mr. Carr is philosophical about the highs and lows of the housing market.  He says he expects life in the industry to remain on the roller coaster for some time to come.

“We used to get Christmas bonuses” of as much as $1,800 a year at the Worth company, he said. “Now, you’re lucky to have a job at Christmastime.”

Mrs. Santo is less anxious about the family finances these days, and is busy planning for the future again.

“Things are much more stabilized now. We hope they stay that way,” she said, noting she has gotten good raises and quarterly bonuses at Wentworth that have increased her income close to where it was a Wachovia.

In fact, things are going well enough that the couple this spring saw opportunity after the cratering in the housing market cut home prices by one-third or more in Pennsylvania and the rest of the country from the highs seen during the housing boom. They bought a foreclosed rowhouse in downtown Philadelphia with $65,000 in cash derived from her father’s home equity. Mr. Carr and Mr. Santo, who owns a home remodeling business, fixed it up working on weekends, putting about $60,000 in construction materials on their credit cards.

The family has a contract to re-sell the city rowhouse to a young urban professional at the end of August. They intend to use the proceeds to pay down bills and refinance their mortgage, following a week-long vacation in Maine last month.

The success with flipping a foreclosed house this year has inspired Mrs. Santo to start planning another project for next year, buying a foreclosed property and fixing it up for resale.

“We know this business well. It’s a lot about timing,” she said. “I enjoy the hunt for a fix-up house. …There’s still a lot of money to be made out there.”

The Carrs envision going into the renovation business part-time to supplement their income and hedge against the vagaries of a housing and job market that — while smiling on them now — could turn hostile and leave them jobless again.

“There’s no loyalty anywhere,” said Mr. Carr, adding that while he believes his current job is safe, there are no guarantees. Madsen already laid him off temporarily last year after a project he was working on was completed.

“One of the things we realize after all this — I’m not counting on my employer” any more, said Mrs. Santo. Even though things are going well this year, “who knows what my employer could decide. They could lay me off tomorrow,” she said.

“Jobs will never be secure like they were in the 1950s and 1960s when people were getting their pensions and gold watches” at the end of a life-long career at one company.

Bearing the brunt

Workers like the Carrs in construction, housing finance and real estate sales bore the brunt of the housing collapse and Great Recession, and the reverberations continue to shake their world today. For the millions of workers in those industries, the unemployment rate remains well above the 8.3 percent national average.

Workers in construction, with an unemployment rate of 13 percent, have the highest rate of joblessness of any major U.S. industry today.

While the housing market was the first to plummet into recession in 2007 and 2008, it has been the last sector to eke out a grudging recovery this year. Most workers in the industry long ago exhausted their 99 weeks of jobless benefits and are living on what little work that comes available. While many have chosen to wait out the storm, some have sought jobs in other areas.

Jim Lowman, a tiler who lives in Ocean City, Md., has gone through long spells of unemployment. He’s taken odd jobs that come open in the resort town, but the pickings have been slim. He’s had to accept contract wages far below what he feels he’s worth, and blames the deplorable state of depressed wages on Hispanic workers, willing to do jobs for only a fraction of what Americans get paid.

Migrant laborers from Mexico and central America often took the lowest-paid jobs as day-laborers on construction sites during the boom. While the dearth of jobs since 2007 has prompted many to return to their home countries, others continue to find work, often at wages around the $7.25 minimum wage that Americans like Mr. Lowman and Mr. Carr would refuse.

“I don’t know how anybody can live on that,” Mr. Lowman said.

Without a steady job in sight, Mr. Lowman has considered moving to Hawaii, where opportunities for housing workers are more plentiful. He was in Hawaii during the housing boom and always made a lot of money because of his connection with a developer there. But he’s held back from relocating because his wife has a job waiting tables in Ocean City and wants to stay near her family in Baltimore.

A battered American Dream

The historic 2008 crisis devastated the lives of workers and businesses in the housing field, but its reach was far broader than that. The housing boom had enabled a record 70 percent of U.S. households to purchase and own their homes, fulfilling an important part of the American Dream. When the bust hit, only a minority of Americans were left untouched by the unprecedented drop in home values of more than a third.

Like a spinning vortex, the crisis dragged down the wealth and financial security of hundreds of millions of people in middle-class families who had invested nearly everything in their homes. Nearly a third of households were left with more debt than their homes were worth. These people are stuck in houses to this day that they would have to sell at a loss, making it very difficult for them to move or relocate to take a new job. Many can’t even take advantage of record low 30-year mortgage rates under 4 percent to refinance and lighten their debt loads because they have no equity in their homes to show the bank.

Millions are choosing to walk away from their homes, losing them to the bank. Defaults and foreclosures have ranged near 12 percent of mortgage holders since 2008 — a stunning blight on America’s credit record that has forever changed the outlook for obtaining a mortgage and owning a home. Buyers now must typically drum up a 20 percent downpayment and have sterling credentials before they can even obtain a loan — a dauntingly high hurdle for many hopeful young people and an impossibility for millions of people with credit troubles.

For the 4 million families pushed out of their homes through foreclosure, and millions more awaiting repossession by the bank, the loss goes beyond the dwelling and extends to their good credit and peace of mind.

Between 2007 and 2011, the Federal Reserve found that the American middle-class lost an unprecedented 40 percent of its wealth due to the collapse in housing prices. It effectively ate away two year’s worth of income and a lifetime of savings in a blow that the average household will take years or even decades to recoup.

Vincent Reinhart, chief economist at Morgan Stanley who has studied the aftermath of debt crises in dozens of countries, said a major financial collapse like the one the U.S. went through in 2008 always delivers a deep and long-lasting blow to the economy, homeowners and workers. Though a recovery has been in place since mid-2009, the shocks from the crisis are still reverberating and are a major reason that it remains a mean, tough economy for workers and their families.

“This harsher climate is a familiar feature after a severe financial crisis,” he said. “A severe financial crisis chills economic performance for a very long time,” both because of the big debts that people have to work off, and the loss of income and savings.

Even for people with manageable debts like the Carrs, “the financial crisis wiped out the equivalent of almost two years’ worth of income from household balance sheets in 2008 and 2009,” he said.

Surviving in the mean economy

With less access to credit and feeling less wealthy and more vulnerable to further economic shocks, U.S. consumers have shown little appetite to spend as they scramble to replenish their savings and rebuild their wealth. The U.S. government, for its part, went deeply into debt trying to rescue the banks and economy from a worse fate, accumulating an $11 trillion debt load that also will slow growth as Congress struggles to bring it under control in coming years, Mr. Reinhart said.

So far, the U.S. experience has been pretty typical for economies going through a major debt crisis, according to Morgan Stanley’s study of the 15 worst financial crises in the second half of the 20th century.

“Economies typically went into a deep and long recession” followed by a “shallow” and unsatisfying recovery, Mr. Reinhart said.

Although the U.S. recovery has been a little better than most other countries studied, the outlook for the economy and workers who need jobs could be overshadowed for years by aftershocks from the crisis, he warned.

“The unemployment rate never regained its pre-crisis low in ten out of fifteen cases,” he said. “Indeed, in seven of fifteen cases, there were two recessions in the decade” following the crisis.

With the housing market finally ekeing out a feeble recovery this year, Eugene Steuerle, fellow at the Urban Institute, sees some hope amidst the rubble of ruined lives.

“There are, of course, real and agonizing losses from a recession,” particularly the lost contribution and income of unemployed workers that may never be fully recouped, he said. But the fall in home values is not entirely bad as it has sewn the seeds for a housing revival, he said.

“The buyer gains what the seller loses,” he said. That was the case with the Carr family, which is benefitting from the sale of another homeowner’s foreclosed property.

For people living in houses that have lost much of their value, the trade-off is similar, Mr. Steuerle said. “A retiree’s hope for selling and then spending down those assets in retirement may be reduced, but his children’s earnings go a lot further if they decide to buy a house,” he said.

Sy Harding, a columnist at Forbes magazine, said the budding revival in the housing market this year may mark a tentative end to the long American nightmare. The National Association of Realtors reported that the number of investor-owned homes surged last year by 64.5 percent, while the number of owner-occupied homes fell 15.5 percent due to the record wave of foreclosures — trends that have continued this year.

Housing revival is critical

“For the past year, real estate speculators and investors have been playing a perhaps heroic role by diving back in on expectation that the real estate market is bottoming,” Mr. Harding said.

The development is ironic, since housing investors got much of the blame for running up house prices in a frenzy of speculation during the bubble years.

“They had played a significant role in creating the bubble — signing contracts, often on multiple homes, making virtually no downpayments, not intending to ever live in or even rent out the homes, but to simply flip them for a quick profit,” Mr. Harding said. “Builders could hardly keep up with demand for a while, but wound up with wastelands of partially completed developments and condo projects, especially in the Sunbelt states.”

Today’s housing investors are not like the infamous “flippers” who contributed to the housing bubble, however, as they are playing a more constructive role in restarting the engines of the long-stalled market, he said. The Realtor group said that investors today appear to view housing more as a long-term investment and are planning to hold onto their properties for five years on average before re-selling.

If there is a genuine revival in housing under way, the stakes for workers and the economy couldn’t be bigger.

Many analysts believe the depression in real estate has been the single biggest factor holding back the overall pace of economic growth and hiring during the three-year recovery. Federal Reserve chairman Ben S. Bernanke has said the U.S. economy cannot experience a sustained recovery without housing.

“If you fix the housing crisis, you fix the job market,” said John A. Challenger, chief executive of Challenger, Gray & Christmas, a Chicago outplacement firm.

Much of the sluggishness in the broader economy “can be traced back to ongoing weakness in the housing market,” he said. “Job seekers cannot relocate to where the job opportunities exist because they are tied down by underwater mortgages and little savings to fund a move.”

The housing depression also is holding back recovery in the broader economy by “stifling demand for consumer goods and services” related to housing, Mr. Challenger said. “When people buy new homes, they also buy new TVs, washers and dryers, refrigerators and furniture. The lack of demand for these big-ticket items translates to a lack of hiring” across the economy.