The recent downturn in housing has potentially
wide-ranging implications for the U.S. economy. To get some
perspective on where this bellwether industry is headed, CFO turned to
Joel Rassman, CFO of Toll Brothers, a publicly traded builder of
luxury homes in 50 markets around the country. While Rassman declines
to make firm predictions about where the housing market is going,
he notes that much depends on consumer confidence — which he believes
won't improve without a change in the nation's political direction.
If Rassman is right, CFOs in other industries might want to keep a close
eye on the outcome of this month's congressional elections.
How bad is the housing slump going to get, and how long will it last?
No one can tell for sure. Every slowdown is unique.
We've seen slowdowns last anywhere from a few months
to three years. But I think the average has probably been
a year and a half, give or take.
What's your best guess as to this particular cycle?
The first market to show slowness was the Washington,
D.C., area, mostly in Virginia, which slowed about the
time of Hurricane Katrina last year and continued until
a month or so ago. It now seems to be showing signs of
stabilizing, or even improving. It's a little early to tell, but
if that's what's happening, and if Virginia is a reliable
indicator, maybe six months from now, if not earlier,
we'll see it turn positive. That would suggest a downturn
that's close to the average of a year and a half.
What would indicate the start of a recovery?
You'll see incentives slowly but surely disappear. And
when that happens, you'll see some consumers coming
back into the market thinking that maybe they missed
the bottom and that they'd better get in before it's too
late. And it builds from there. There is even the potential
for a significant shortage of housing, because in
many markets it takes anywhere from two to five years
to get approvals for development.
Do you think this downturn will be longer than usual?
I think this is a different slowdown in that it wasn't started
by the macroeconomic forces that typically start
one — high interest rates, job losses, or a slow economy.
Instead, it was started by significant oversupply, created
by speculators and builders who built units on spec. Those speculators who
then put those units on the market were reducing demand at the same time,
because they were no longer buying new units and increasing
supply. So that was a double whammy in terms of supply
Didn't the Fed's interest-rate increases have an effect?
Exclusive of about a year's period of time when they were
lower, mortgage rates are about as low as they've been.
It's still a good time in that respect to buy a house.
How did Katrina figure into the equation?
Katrina really hurt consumer confidence, insofar as it
reflected an inability of our government to deal with
catastrophes. Whether that decline in confidence was
justified doesn't matter. When housing is one of the
largest purchases that people make, and they feel
uncomfortable doing that, they tend to delay. And I think
that's what you see.
Our impression had been that Katrina had less of an impact on the economy than expected. But you're saying that it had an indirect impact that statistics fail to capture, one based more on consumer perceptions?
There have been all kinds of studies that find a connection
between consumer confidence and faith in the government.
And the more affluent buyer, which is more
our [customer], probably reads more and reacts earlier to
information. So his confidence is affected first.
Why would concern about the government's response to a catastrophe have an effect on the economy?
It's about confidence in the country overall. A couple of
studies have been done that find a relationship between
the economy's performance and how inspiring the U.S.
President is. One of our regional presidents did a thesis
on this a number of years ago. We just started looking at
this, as his work was cited at our most recent board
meeting, in mid-September.
Would progress on the budget deficit help?
I think it's more than that. I'm not an economist, but it
is clear to me that when we are inspired by whatever our
leader does, we can do better as a country. I look at the
first George Bush, and he didn't inspire us. Even though
the economy turned around in that Bush Administration,
Bill Clinton inspired us a lot more. I look at a lot of
things that Clinton did, and I think they probably
weren't as good as what some other Presidents did — and
yet we were inspired by him. It's just like corporations
and CEOs. Great CEOs make great companies. If you
have a great company but not a great CEO, the company
doesn't do as well. Part of that is leadership — inspiring
So where is confidence today?
We're at a time when there isn't a lot. You look at [George
W.] Bush's ratings and you don't get the feeling that the
country is inspired. Whether he can turn that around or
not, I don't know. I think when people thought after 2001
that he was doing a great job, they were buoyed. And now
that they question the job he's doing — not me, this is not
a political statement of mine — but if you look at the polls,
you're looking at more gloom and doom. I just think
there is a relationship.
Bush's Economic Toll?
Toll Brothers regional president Barry DePew wrote his master's in finance thesis on the correlation between presidential job ratings and consumer confidence, which CFO Joel Rassman cites in his interview with CFO, as the fundamental cause of the downturn in housing. While DePew couldn't supply a copy of his thesis because his professor never gave it back, the work won him a degree from Drexel University in 1983. And DePew recalls that his research found a correlation going back at least far as the aftermath of the civil war, and that presidential job approval ratings were even more of a leading economic indicator than consumer confidence.
"When confidence is low in the president," DePew adds, "things have never been good."