Notebook > Money

Cracked foundation

Money | Builders, investors offer a bleak outlook on the housing market

Issue: "The 2007 Books Issue," June 30, 2007

It's shaping up to be a cruel summer for the U.S. homebuilding industry, which only a few years ago seemed to be powering the American economy. The troubles are mainly of the economic variety, but homebuilders have also become part of the biggest domestic political fight of this election season-the debate over illegal immigration.

On the economic front, hardly a week goes by without more bad news emerging. Last week, the National Association of Home Builders (NAHB) said that industry confidence was at a 16-year low. The group's index for rating its members' views of market conditions fell to 28, the lowest reading since February 1991. A rating below 50 shows a low level of confidence; last year at this time the index stood at 42.

Behind the gloom and doom is continued fallout from the reckless lending and borrowing of the past several years (see "Arms have legs," Nov. 26, 2005). RealtyTrac Inc. reported on June 12 that there were 90 percent more foreclosure filings in May than during the same month in 2006. Interest rates on 30-year fixed mortgages, meanwhile, shot up to 6.74 percent.

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"The environment is still very tough for builders," economist Joshua Shapiro told the Bloomberg news service. "There is still a lot of inventory out there and higher mortgage rates certainly don't help."

All of this occurred as NAHB lobbyists turned up the heat on Congress to oppose parts of the Bush-Kennedy immigration overhaul. Homebuilders were specifically worried about provisions that would penalize them for hiring illegal aliens or using subcontractors that hire illegals. They also argued that disruptions in the flow of immigrant workers "would do irreparable harm" to their industry.

Add it all up, and investors had reason to be bearish about builders. Despite strong gains this year for the stock market, stock prices for major homebuilders have dropped as much as 25 percent.

Balance Sheet

CRIME: Kenneth Rice, who once headed Enron's broadband division, is going to jail. A federal judge last week sentenced Rice to 27 months in prison for lying to investors about his division's prospects in 2000 and 2001. Rice had pleaded guilty and worked with prosecutors in their cases against Enron executives Kenneth Lay and Jeffrey Skilling.

BUSINESS: Yahoo CEO Terry Semel stepped down last week amid growing complaints from shareholders about the amount he was paid ($71.7 million) in 2006. Semel was the highest-paid CEO among S&P 500 companies even though Yahoo lost market share to Google during his tenure. Yahoo's share of the search engine market is 21.9 percent, compared to Google's 55.2 percent. Semel will remain on Yahoo's board as chairman.

CELEBRITIES: A series of pirate films brought enough treasure to its director and star to land them on Forbes magazine's annual list of biggest moneymaking celebrities. Pirates of the Caribbean director Jerry Bruckheimer and star Johnny Depp raked in $120 million and $92 million, respectively, to land 2nd and 5th on the Forbes list. Oprah Winfrey topped the list with $260 million, followed by Bruckheimer, Steven Spielberg ($110 million), Tiger Woods ($100 million), and Depp.

Timothy Lamer
Timothy Lamer

Tim is managing editor of WORLD magazine.

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