Housing

It’s not really an industry

Ireland

Ireland is apparently the first European country to officially fall into a recession. Part of the blame for their economic troubles has been laid to not diversifying the economy and relying on builders. They are not the only country to have mistakenly seen homebuilding as a major part of their economy. Britain and the US have made the same mistake.

Homebuilding is an adjunct to economic upturns, it isn’t the basis for them.

For some time now, many economies, both local and national, have come to rely on the homebuilding business as an integral part of their base. A couple of years ago in California's central valley, the joke among some in the business was that “we are eating our young.” They had a vicious circle going. The pace of homebuilding was such that there weren’t enough personnel available. Thus, workers were recruited from other areas. Of course, these new hires needed somewhere to live, so production increased in order to provide homes for them to buy. Homebuilding was the new industry of the area. While there was some growth from other industries, there was not enough to sustain the real growth that the homebuilders needed. Local people “traded up,” assisted by easy credit, and prices accelerated. Note that I didn’t say values. As has been seen since then, the true value of homes in that market largely remained the same.

Homes aren’t speculative investments- they're where you live.

Unfortunately, in an attempt to make homebuilding an “industry,” many homebuilders moved away from the concept of providing shelter and embraced the idea that people should “move up” periodically. The concept that families only moved when they outgrew their homes, or the breadwinner took a new job elsewhere, became passé. Appreciation was to be counted on and the resulting increase in equity was to be exploited. Why let that asset lie unused, when one could get a newer, fancier house? Lenders and mortgage brokers have contributed to this bad idea by allowing people to “overbuy” with the theory being that appreciation would cure all ills. Hopefully with the meltdown, this practice won't be seen again.

Counting on appreciation lead to speculation. While there is speculation in all aspects of real estate, a relatively recent phenomenon is using one’s own home for speculation. This practice has been encouraged by builders, real estate agents, and lenders. It’s the equivalent of a gambler rolling the dice with all of his money, including that for food and rent. A bad idea. The culture that has encouraged this situation must change.