Builders Unfazed as Housing Market Cools

The pace of new homes is starting to slow. Some would-be buyers are being scared off by higher interest rates. But most builders are downplaying the long-term significance of the dropoff.

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SHEILAH KAST, host:

Retail sales may be hot this holiday season, but the once red-hot US housing market is cooling down. Builders of new homes are seeing that on the ground. Inventories of new homes are up 20 percent above this time last year and contractors are starting to pull back on new construction. But as NPR's Chris Arnold reports, most don't think the sky is falling.

CHRIS ARNOLD reporting:

At a sprawling subdivision in Northbridge, Massachusetts, workers nail vinyl siding on to one new house and use an earthmover to pile dirt up around the foundation of another. These three- and four-bedroom homes are selling for around half a million dollars.

(Soundbite of earthmover)

ARNOLD: Northbridge is an hour west of Boston. In recent years, some 700 new homes have been built here, with nearly 600 more in various stages of planning and permitting. But in just the past few months, sales have been slowing down sharply.

Mr. BRUCE TAYLOR (Developer and Home Builder): Last year at this time, we were probably selling two or three times as many houses in this marketplace.

ARNOLD: Bruce Taylor is the president of a major realty office in town and he's also a developer and a home builder. He says over the past few years, people were tripping over themselves to buy homes like this. Now with interest rates inching higher, there aren't as many buyers. Meanwhile, the inventory of new homes has been building.

Mr. TAYLOR: In the last three months, there have only been three or four new homes that have gone under agreement and that compares to 45 new homes that are available in this town right now for sale.

ARNOLD: At that rate, most of these new homes would be standing empty for two years. But Taylor expects things will pick up in the spring. He thinks mostly what's happening is the housing market is shifting gears from overheated back to just a regular market where things slow down in the winter. So he doesn't see any signs of a housing bubble that's about to burst.

Mr. TAYLOR: I don't think there's any major correction to be had at all, not at all. The economy's very strong. Interest rates are up over the last six months. But you know what? They're better than they've been in the last 30 years. So interest rates are terrific.

ARNOLD: That's a feeling that echoed by executives at some very large home building companies, as well. Richard Dugas is the CEO of Pulte Homes, a national home builder with projected revenues of $14.5 billion this year.

Mr. RICHARD DUGAS (CEO, Pulte Homes): I think what you could characterize the market as today is becoming more normalized as opposed to the euphoria that we were seeing for the last two or three years. And as we look at the markets across the country, clearly the rate of price appreciation has slowed.

ARNOLD: But Dugas says he does not consider the housing market to be soft right now. Nationally, home building and home sales remain at near-record levels. Dugas says the market is healthy and will stay so as long as interest rates don't rise too fast and the overall economy remains solid.

Mr. DUGAS: You know, it doesn't have to be white-hot in order to be healthy. I think moderate rate increases from here combined with good job growth, you know, mean another good year in 2006.

ARNOLD: But Dugas says Pulte is pulling back slightly from its previous rate of building new homes. So are other home builders, and many economists say that's a good thing. Mark Zandi is chief economist with Moody'sEconomy.com.

Mr. MARK ZANDI (Chief Economist, Moody'sEconomy.com): It's absolutely necessary. I mean, we're putting up too many homes. Underlying demand for new homes is at best two million units per year, and we're putting up homes at a rate that's well above that. At least we have been for the past year. So if this rate of construction continues, then we will see real signs of overbuilding in many parts of the country.

ARNOLD: Zandi is decidedly less rosy than many home builders in the language he uses to describe the current housing market.

Mr. ZANDI: You know, housing is at the mountaintop. All roads lead down; it's just a question of how steeply.

ARNOLD: Some economists for years now have been warning of a housing bubble that's going to crash Hindenburg style, but like the home builders, Zandi does not think that's going to happen.

Mr. ZANDI: We'll see some markets, some parts of the country where we'll see price declines, but I think in most cases, they'll be very modest.

ARNOLD: But economists say the cooling housing market will mean fewer jobs. Zandi says over the past three years, a full third of new employment has been directly related to housing. So any slowdown will be felt by thousands of construction workers, plumbers, realtors and others across the country. At the work site outside Boston, home builder Bruce Taylor says he's already seeing an impact.

Mr. TAYLOR: The amount of work available in the marketplace has slowed down considerably. There are tradesmen today who are looking for work who six months or a year ago had their dance card completely full and they were booked up months and months in advance. Some of the people that I know have actually sent crews down to the Gulf states to help in the reconstruction boom that's going on down in Louisiana and the other communities there.

ARNOLD: Stock analysts who track big home building companies say they're looking at two main things: employment and interest rates. If rates rise too fast or if the economy starts losing too many jobs, that could really sink the housing market. Chris Arnold, NPR News, Boston.

KAST: It's 18 minutes past the hour.

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