Implications of the Soft Housing Market for Suppliers of Building Products

Published Tuesday, July 31, 2007

During the 2004-2005 housing boom, the U.S. home building industry operated at a level unsustainable by population growth and new household formation – generally agreed to be about 1.95 million new units annually. Low interest rates and aggressive lending tactics increased affordability and drew homebuyers who typically would not have qualified for homeownership into the market. Further, the double-digit annual appreciation rates of homes lured investors looking for high returns into the market.

Throughout this period, housing industry experts held a unanimous conviction that this pace of new home production was unsustainable, and any output above the long-term sustainable demand would result in a corresponding underproduction after the new home market corrected. There was little doubt that the market would adjust back to more moderate levels. The primary debate centered on when the market correction would begin and how long it would take. If the correction was gradual, the housing industry would experience a “soft landing.” If it occurred more quickly, the industry would experience a less desirable “hard landing.” 

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